William Lyon Homes (WLH) Q2 2019 Earnings Call Transcript

William Lyon Homes (WLH)
Q2 2019 Earnings Call
Aug 01, 2019, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the second-quarter 2019 William Lyon Homes earnings conference call. My name is Dilem, and I will be your operator today. [Operator instructions] This call is being recorded and will be available for replay through August 8, 2019, starting this afternoon, approximately one hour after the completion of this call. [Operator instructions] Now I'd like to turn the call over to Mr.

Larry Clark, investor relations for the company. Please go ahead, Mr. Clark.

Larry Clark -- Investor Relations

Thank you, Dilem. Good morning, and thank you for joining us today to discuss William Lyon Homes' financial results for the three months ended June 30th, 2019. By now, you should receive a copy of today's press release. If not, it's available on the company's website.

The press release also contains a reconciliation of non-GAAP financial measures used therein. In addition, we're including an accompanying slide presentation that you can refer to during the call. You can also access these slides in the Investor Relations section of the website. Before we continue, please take a moment to read the company's notice regarding forward-looking statements which is shown at Slide 1 in the presentation and included in the press release.

As explained in the notice, this conference call contains forward-looking statements, including statements concerning future financial and operational performance. Actual results may differ materially from those projected in the forward-looking statements, and the company does not undertake any obligation to update them. For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see this company's SEC filings. With us today from management are Bill H.

Lyon, executive chairman and chairman of the board; Matt Zaist, president and chief executive officer; and Colin Severn, senior vice president and chief financial officer. Now I'd like to turn the call over to Bill Lyon.

Bill Lyon -- Senior Vice President and Chief Financial Officer

Thank you, Larry. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. During the second quarter, we posted solid results that were in line with our guidance ranges across substantially all of our operational and financial metrics. We delivered 1,033 homes during the second quarter, generating homebuilding revenue of $464 million, both of which were up from the first quarter.

Year to date, our results for homebuilding revenue and new home deliveries demonstrated growth over the prior- year period of 3% and 9%, respectively. Our adjusted pre-tax income for the quarter was $20.5 million, and adjusted net income available to common stockholders was $12.2 million or $0.31 per diluted share. We ended the quarter with a William Lyon Homes stockholder equity of approximately $884 million and total equity north of $1 billion, equating to an overall book value per share of $23.39 and a tangible book value per share of $19.94. From a demand perspective, we're pleased with our sales momentum which has continued into the second quarter after a solid start to the spring selling season.

Our net new-home orders of 1,261 homes, posted an increase from the first quarter, both in the number of homes sold and the order pace. Overall, we continue to see a number of positive dynamics influencing our markets, including a steadily improving economy, job growth, household formation, high consumer confidence, and historically low mortgage rates. For the second consecutive quarter, the entry-level and first-time move-up buyer segments combined to represent over 80% of both our closings and backlog as of the end of the quarter. Over the past several years, we have made investments in strategically shifting our products to focus more heavily on these buyer segments.

We made this shift across an expanded, more diversified geographic footprint, and we have consciously driven down ASP in virtually every one of our operating divisions to address increasing affordability concerns. More recently, we have made investments to complement our core homebuilding operations with a more robust financial services portfolio. Overall, I would say that the story of the second quarter is one of continued, steady execution and cultivation of some operational investments, such as financial services and our geographic expansion into Houston, which we believe will drive improved profitability going forward. We're encouraged by our results during the first half of the year, and we believe that we are well positioned to execute on our expectations for the balance of the year while setting us up for further growth in the years ahead.

With that, I will turn the call over to Matt for additional commentary on our second-quarter operations. Matt?

Matt Zaist -- President and Chief Executive Officer

Thanks, Bill. As Bill stated, the second quarter of 2019 played out generally as we had expected. A year ago, we saw a deceleration in pace in Q2 over Q1, which reflected tightening affordability and rising interest rates and was a precursor to the slower back half of the year. This year, we're encouraged by the evolution of the spring selling season with increased absorption rates in Q2 over the first quarter, which is a more typical cadence, if you look back historically.

Overall, I'd categorize the Western U.S. homebuilding market as stable to improving. Absorption in the second quarter increased 10% over the first quarter to a healthy pace of 3.4 sales per community. We had a number of divisions that were up year over year on total orders and absorption, and our overall results were disproportionately impacted by slowness in our Oregon division, which has been a really strong performer for us over the past several years.

Excluding Oregon in the second quarter, our overall net orders on a combined basis were up 10% year over year. I'll get back to Oregon in a few minutes, including steps we're taking to ensure that this important division continues to be a meaningful contributor for us going forward. From a demand perspective, our top-performing markets during the quarter were once again, Colorado, Central Texas, and Arizona, all of which experienced monthly absorption rates well in excess of the company average. As Bill mentioned, much of our success in these markets can be attributed to our focus on the entry-level buyer segment, where we continue to see a positive response to our high-quality and attainably priced product.

Our Colorado division had another great quarter, recording 183 net new home orders, which is a 14% improvement over last year, while selling from four fewer communities. Our monthly sales pace in Colorado, during the second quarter, increased 56% year over year to 5.5 sales per community, its highest level since we entered that market in 2012. The average sales price for closings during the quarter was $423,000, which compares favorably to the median, new, and existing home sale prices of $506,000 and $451,000, respectively, in the Denver MSA. We continue to be extremely pleased with our acquisition last year, which added the Greater Austin marketplace as a key new home market for us.

In a relatively short period of time, we've become a significant player in the Austin homebuilding market. Q2 represented the first period with a full year of operating results in Central Texas. And in that trailing 12-month period, the division has contributed 895 orders and 803 deliveries to our results. During the second quarter, our Central Texas operations recorded 273 net new home orders, up 33% year over year, which translated into a monthly absorption pace of 4.1 sales per community.

That division also sold and closed over 100 spec homes during the second quarter, continuing to efficiently turn its inventory. As compared to the fourth quarter of last year, we continue to reduce incentives in this market and are seeing some modest pricing power. Based on our success in Austin, we are excited about replicating our operating strategy in Houston. We now own approximately 750 lots and have identified a number of additional acquisition opportunities.

We expect to start construction on our first models later this year and open five to seven new communities in Houston in the first half of 2020. Arizona continues to pick up momentum, as it generated a second quarter absorption rate of 4.9 sales per community per month, up from a 4.1 pace in the first quarter. Overall, orders for the Arizona division during Q2 were up 13% year over year. Looking ahead, we are very excited about the work that is now under way on our legacy Rancho Mercado master plan in the Northwest Valley at Phoenix.

With approximately 1,900 lots, Rancho Mercado represents an opportunity for long-term sustainable community count growth in that division. Models are currently under construction. We expect to be opening six new communities there later this year and one more next year. In Washington, we experienced a nice pickup in our sales pace from the first quarter, booking four sales per community per month, the fastest pace in over a year.

We believe the extremely healthy sales pace in Q2 demonstrates that Washington is returning to a more stabilized and normalized marketplace, despite having slowed down and been a drag on our results for the last few quarters. This market was really negatively affected by interest rate increases and a multiyear run of double-digit price appreciation, but it still has very attractive fundamentals, including having one of the best job markets in the country, a very limited housing supply, and high barriers to entry. We're pleased to see the market returning to healthy levels of buyer demand. For our California operating segment, overall net new home orders were up 5% year over year to 354 units, reflective of an overall sales pace of 2.9 sales per community per month.

Breaking this down further, Southern California, our monthly absorption rate was 2.8 sales per community, which yielded an overall orders number that was up 13% year over year. We successfully opened seven new model complexes during the second quarter at our Novel Park master plan in Irvine, California, a project which we've highlighted on prior calls, in which we expect to be a meaningful contributor for the division going forward. Year to date, we booked approximately 100 net new sales at Novel Park. In Northern California, we experienced a monthly sales pace of 3.6 homes per community, up from 2.7% in the first quarter.

Total net orders for the division were down by about 24% year over year. That's really a matter of being gapped out of active communities after having wrapped up our extremely successful Bayshores project at the beginning of this year. It's also taking us longer than expected to be completely up and running with fully furnished models at our new SoHay master plan due to weather and utility company delays. That said, we continue to be very excited about this well-located, in-fill master plan that will be an anchor for our Bay Area presence over the coming years.

In Nevada, we experienced a sequentially improved monthly absorption pace during the second quarter at 2.6 sales per community, picking up on the low levels realized in the last several quarters. We are starting to see improved consumer demand due to the repositioning and price adjustments we have implemented in certain of our projects. On a same-store basis, our orders in Nevada were up 12% over last year's second quarter. In Oregon, the market is still underperforming from a year ago, and this is the one market where we haven't seen the sort of measured recovery we've experienced in our other markets.

This is an extremely important market for us. Since 2016, we've delivered approximately 2,100 homes and generated pre-tax income of over $100 million in this division. In the second quarter, we had a few challenges in this market. As we said last quarter, we've been gapped out on our supply of attached and small lot detached homes, which has historically been our best-selling product segments.

We also experienced certain operational challenges and, therefore, have made some recent changes in key divisional leadership positions. As we move through the balance of this year, we expect to bring online more of our attached and small lot detached products starting in the third quarter, which should help drive incremental consumer demand. We also feel that the leadership adjustments will maximize our opportunity for driving improved results in the back half of 2019, as we -- as well as provides with better long-term opportunity for success in this important market. Companywide, our dollar value of orders for the second quarter of 2019 was approximately $570 million which is down 9% year over year.

The year over year decline is driven primarily by lower ASP of orders due to mix, including a higher percentage of orders from Central Texas and Arizona operations and our continued focus on the entry-level buyer segment across all divisions. A couple of years ago, we began implementing our modified spec start strategy, and we feel that the improvement in our conversion rate over the past two quarters is a demonstration of the resulting benefits. For two consecutive quarters, we've achieved backlog conversion rate improvement of more than 1,000 basis points over the prior year's comparable, and we expect to see Q3 demonstrate similar improvement on a year-over-year basis. This meaningful change in our operating strategy has not only facilitated better predictability in operating results, but has also allowed for more efficient capital terms, which ties into other strategic initiatives, such as deleveraging our balance sheet in the coming quarters and years.

In addition to operational improvements in shorter cycle times, we believe that our improvement in this year's conversion rate is a reflection of the continued lack of quality resale inventory at the entry-level to meet the desires of a need-based buyer who is looking to move in the next 90 days. As evidence of this, we had another solid quarter of spec sale activity in Q2, with 405 homes sold and closed during the same quarter, up from 292 in last year's second quarter, an increase of 39%. Our average community count for the second quarter was 123, up from the 107 average communities during the prior-year quarter. For a discussion on our financial results, I'll turn the call over to Colin before wrapping it up with some commentary on our outlook for the back half of 2019.

Colin Severn -- Senior Vice President and Chief Financial Officer

Thank you, Matt. Total homebuilding revenue for the second quarter of 2019 was $464 million, as compared to $518 million in the year-ago period. The decrease in home sales revenue was due to a 5% decrease in the number of homes delivered and a 6% decline in ASP. The decline in ASP is mix driven due to a higher concentration of deliveries from Central Texas.

During the second quarter, our homebuilding gross profit was $74 million compared to $93 million in the second quarter of 2018, and our adjusted homebuilding gross profit was $94 million. GAAP gross margins for the second quarter were 16%, in line with our expectations. The year-over-year decline in gross margins was primarily due to an increase in sales incentives in certain projects as compared to the year-ago period. Incentives as a percentage of revenue for homes closed during the second quarter were 2.9% compared to 1.8% in the same quarter last year.

As we have moved through the year, incentives have abated as absorptions have increased with our incentives as a percentage of revenue in Q2 of 2019 being 40 basis points lower than they were in Q1. Our adjusted homebuilding gross margin percentage was 20.3% during the second quarter and 23.3% in the year-ago period. Our sales and marketing expense for the second quarter improved to 5.5% of homebuilding revenue compared to 5.6% in the year-ago quarter, primarily due to our operational focus to reduce advertising and model operations expense. General and administrative expenses increased to 6.4% of homebuilding revenue.

During the second quarter, we incurred approximately $1.2 million of onetime costs related to staff reductions from a consolidation of our coastal Southern California and RSI Inland Empire operating divisions into a regional operation under John Robertson's leadership. We expect the long-term run rate at the Southern California reorganization to result in approximately $3.5 million to $4 million of annualized savings. Adjusting for this onetime expense, G&A expense for the quarter would have been 6.1% and total combined SG&A percentage would have been 11.6%. Taking a deeper dive into our G&A expense, over the past several quarters, we have also been investing in two segments of our business with little to no offsetting revenue, including the start-up of our Houston operations, as Matt mentioned, and our investment in financial services which I'll discuss shortly.

As we think ahead opportunities for incremental SG&A leverage, it is worth noting that over the last four quarters, these incremental costs added approximately 40 basis points of headwinds to LTM SG&A. The company expects to benefit substantially from leverage as those new businesses produce revenue in the future. As discussed previously, the company has announced the formation of ClosingMark Financial Group, a wholly owned subsidiary, under which we intend to create a more efficient and profitable financial services platform, including mortgage, title, and settlement services. In April 2019, we closed on the acquisition of a mortgage platform, South Pacific Financial Corporation, which has been rebranded ClosingMark Home Loans.

Making this strategic shift to a wholly owned financial services platform allows us to be in control of our own destiny, as well as recapture the other half of joint venture income that has been going to our partners. We anticipate integrating our existing mortgage joint venture operations and loan pipeline into this platform under the ClosingMark brand during the third quarter. Under ClosingMark, we have recently commenced title agency services in the Central Texas, Arizona, Colorado, and Nevada markets and expect to expand title and settlement services operations into virtually all of the company's homebuilding markets over the course of the next two quarters. During the three and six months ended June 30th, 2019, we are reporting these operations as a financial services segment separate from homebuilding operations.

This segment will report the operations, assets and liabilities of the business lines mentioned above as wholly owned operations, as well as our unconsolidated mortgage joint ventures until it is folded into the wholly owned platform. During the second quarter, our unconsolidated mortgage joint ventures recorded income of $1.4 million. Also during the quarter, the ClosingMark home loans and title business recorded a loss of $1.3 million, primarily related to costs incurred preparing for the ramp-up of our operations to absorb the transfer of the backlog and loan pipeline from our mortgage joint venture operations, as well as staffing for organic growth. Lastly, during the quarter, we incurred onetime transaction expenses related to the mortgage company acquisition of approximately $1 million.

Although we haven't yet realized the full benefits from our investment in financial services, we have made significant progress and believe it is the right decision to improve the homebuyer experience, while creating long-term shareholder value. Looking ahead, we are currently expecting income from our financial services operations to be between $1.5 million and $2 million for the third quarter of 2019 and between $3 million and $3.5 million for the fourth quarter of 2019. Provision for income tax was $3.9 million during the quarter or an effective tax rate of 21%, compared to a provision of $7.8 million or 22.2% in the prior year. We would anticipate our income tax rate to be approximately 21.5% to 22% in the third quarter.

Net income attributable to non-controlling interest was $4 million during the second quarter, as compared to $4.8 million in the prior year. Net income available to common stockholders during the second quarter was $10.5 million or $0.27 per diluted share based on 39.1 million fully diluted shares. Adjusted net income after adjusting for the aforementioned onetime expenses was $12.2 million or $0.31 per diluted share. Our land acquisition spend for the second quarter was $142 million, including land acquisition and horizontal development costs.

We expect to continue to moderate our land spend at a level consistent with our long-term leverage goals, while also strategically allocating capital to our markets. As of the end of the quarter, our total lot count of owned and controlled lots was 28,778 lots. Option lots accounted for 35% of our total lot inventory. Our goal is to maintain option lots as a percentage of total lot inventory closer to 40%.

Now turning to our balance sheet. We ended the quarter with $2.6 billion in real estate inventories, $2.9 billion in total assets and total equity of $1 billion. We ended the quarter with total liquidity of approximately $260 million, including our cash balance and the availability under our revolving credit facility. Our total debt to book capitalization was 57.9% at the end of the quarter, and our net debt to net book capitalization was 57.3%.

In June, we capitalized on our company's strengthening balance sheet and the favorable conditions in the high-yield market as we launched and priced a $300 million senior notes offering at a coupon of 6.625%. The offering closed in Q3, and the proceeds are being used to redeem the majority of our $350 million, 7% senior notes due 2022, leaving the remaining $50 million to be repaid with free cash flow. In addition, during the third quarter, we worked with our lender partners to execute an amendment to our revolving credit facility to extend the maturity date by one year to May of 2022. We continue to expect cash flow generation to be more significant in the back half of the year, and we remain focused on achieving our leverage goals through earnings generations and principal debt reduction, all as part of our overall deleveraging strategy.

Now I'll turn it back to Matt.

Matt Zaist -- President and Chief Executive Officer

Thanks, Colin. Before we open the call to your questions, I'd like to provide some additional information regarding our outlook for the balance of the year. As I previously mentioned, we are pleased to see a majority of our markets stable to improving. While still taking a measured approach to pricing, we've been able to reduce incentives and increase prices in certain markets and anticipate sequential improvement in gross margins in the back half of the year.

Our anticipated full-year results now include deliveries of 4,300 to 4,500 units and revenues of $2 billion to $2.075 billion for 2019. For the third quarter of 2019, we are expecting new home deliveries of between 1,015 and 1,080, which would represent a backlog conversion rate of 71% to 76%. At the midpoint of our guidance range, it would represent another quarter of 1,000 basis points of year-over-year backlog conversion rate improvement. We expect ASPs for deliveries during the third quarter to be approximately $465,000.

As I previously mentioned, we anticipate sequential gross margin improvement in each of the two remaining quarters. For the third quarter, we are expecting gross margin sequential improvement of 35 to 40 basis points. We would expect capitalized interest and cost of sales to be fairly flat quarter over quarter. Our anticipated SG&A percentage for the third quarter is expected to be between 11.4% and 11.6%.

As Colin has explained in the past, there are certain challenges in predicting noncontrolling interest from our homebuilding joint ventures. We do anticipate that we see an increase in noncontrolling interest due to anticipated first closings at a number of new California homebuilding joint ventures that are delivering in the third quarter. We currently anticipate income attributable to noncontrolling interest of approximately $8.5 million to $9 million in Q3. We would anticipate the third quarter to be the high watermark for noncontrolling interest for the year.

In closing, since the volatility experienced in the back half of last year, we've seen a reduction in rates, a reset in pricing on both new and resale homes and improving demand, which is a long-term positive. Specific to William Lyon Homes, we were encouraged to see the increase in sales pace quarter over quarter and are excited by our new community openings, the success we've experienced in Central Texas since our acquisition and the anticipated grand opening of our first communities in Houston. As Colin previously mentioned, we look forward to realizing the future revenue and earnings growth from our fully employed financial services in the next couple of quarters and gaining the full benefit in 2020 of both of those new segments, including improved SG&A leverage. I'd now like to open up the call to your questions.

Operator, we're ready for the first question.

Questions & Answers:

Operator

Thank you, sir. [Operator instructions] Our first question comes from Alan Ratner from Zelman & Associates. Please go ahead.

Alan Ratner -- Zelman and Associates -- Analyst

Hey, guys. Good afternoon. Thanks for taking my questions. So Matt, just on the Oregon commentary there, and I was curious if you maybe you could expand a little bit in terms of what the competitive landscape looks like there? Because I know that's a market where I think a few builders have entered recently and others have made an effort to expand.

And I'm curious if part of the struggles you guys were experiencing has to do with anything that some of your competitors are doing, either on a pricing side or land side that might be putting you at a disadvantage on top of what it sounds like it might be some company-specific nuances with community openings and whatnot.

Matt Zaist -- President and Chief Executive Officer

Sure, Alan. Look, I think that market overall is still down double digits year over year relative to new home sales. Obviously, as you mentioned, I think, historically, that's been a market where there's been really three public homebuilders, ourselves included, that have been the major players in that market. We've seen a number of new homebuilders on the public side double in the last couple of years.

So I think an overall market being down in terms of transactional volume, increasing the number of competitors in that market has some effect to that. That said, we look at our absorption in Oregon by product segment, the entry-level and first-time buyer segment, entry-level is still absorbing at close to 3 sales per month in the quarter in Oregon, but our available communities and product offerings in that segment are lacking. It's something that we've got to do a better job of getting lots on the ground to kind of meet that buyer need at whatever appropriate segment we're seeing demand. We control three large master plans in that market.

So I think we've got well-located lots and lands that have developed and produced really good results for us over the last few years. But I think part of this is -- that's a market that still needs to recover. It's our smallest market in terms of total permits, as well as total employment population. But our expectations are, we should do better.

And as I said, I think we've taken some steps on the management side, as well, to increase our talent at the divisional leadership level, as well as our sales leadership, and would expect to see better improvement as we move through the balance of the year into next year.

Alan Ratner -- Zelman and Associates -- Analyst

Got it. And that's helpful, Matt. Thanks for going into that. Second question.

You guys referenced several times the kind of the leverage goals and targets. And I was hoping you might be able to put maybe some finer points on that just in terms of when do you expect to have that $50 million paid off on the 2022 notes and with the revolver balance. Any kind of guidance you can give us just on cash flow generation you expect over the next couple of quarters and where you hope that leverage target to be next year?

Colin Severn -- Senior Vice President and Chief Financial Officer

Yeah, Alan, it's Colin. I think, for us, our goal is to repay the revolver down this year, as well as the $50 million. Consistent with prior years, we have a tremendous amount of cash flow generation in the back half of the year. And then leverage goals consistent with kind of what we've thrown out there for the end of this year and 2020, it's still on pace for those targets.

Matt Zaist -- President and Chief Executive Officer

Yeah. I'd just add on to that, as we've said previously, as we reduced our total land spend goals for this year between acquisition, as well as horizontal development by about $100 million year over year with the point that Colin just mentioned, which is to pay that principal down as we move through the balance of this year. And I think part of what -- a little bit of new ones are kind of the lot count land spend this quarter. This was our highest land spend quarter in Q2.

And we did take down a larger piece in Austin beginning in the second quarter, which brought our lots under option down to about 35% from that 40% run rate that we've been at. So I think, taking steps to continue to be more capital efficient and -- while paying off the principal and revolver at the end of this year. I think next year, continuing to work to drive debt-to-cap down below 50%.

Alan Ratner -- Zelman and Associates -- Analyst

Hey, Matt, just to tack on one last one on that point because it's related. Just with what you mentioned about being more capital efficient, I think there's maybe a little bit of a question whether you can delever and grow at the same time. And obviously, there's a lot going on in the portfolio. You're entering Houston.

Your community count growth has been among the highest in the industry. So how should we think about beyond this year, just the interplay between the focus on generating cash flow deleveraging, but also, is there an ability to grow the top line as that's going on? Or should we expect the shrinking of the business?

Matt Zaist -- President and Chief Executive Officer

No, we certainly don't think of shrinking. Look, I think part of what we've found is -- and I think if you look at what we've done to kind of transform our lot inventory in markets like Denver, where we've got substantially all of our lot supply on a forward option rolling basis. Texas, we think, between Austin, as well as going into Houston, is a way that we can be significantly more capital efficient from a growth perspective. The company, right now, as we look at community count growth going into next year, I think, as we mentioned, we've had Rancho Mercado, the long-standing asset for the company that's coming to market later this year.

Houston, obviously, delivering community-count growth, as well as Nevada is a market where we think we're going to have an ability to increase our ability to be more capital-efficient from an option perspective. We're targeting community count this time next year somewhere in the mid-130s. But it's going to be continuing to focus on keeping our option lots at least 40% of our lot count to achieve that. I think the geographic expansion into some markets where that strategy works more efficiently is key to that.

I wouldn't expect to see growth in California. I think our goal in California is really kind of maintain our market presence. But those markets where we've got the ability to be more capital efficient is where we're going to see the growth over the next year or two.

Alan Ratner -- Zelman and Associates -- Analyst

Very helpful. Thanks, guys.

Matt Zaist -- President and Chief Executive Officer

Thanks, Alan.

Operator

Thank you. Our next question comes from Michael Rehaut from J. P. Morgan.

Please go ahead.

Michael Rehaut -- J.P. Morgan -- Analyst

Thanks. Good afternoon or good morning, everyone. The first question I had was just on, I guess, current demand trends. I was wondering if you had any comments on how July is doing in terms of overall order growth and sales pace, as well as during the quarter, if you could just talk to the incentive trends and pricing trends.

And I believe you said that incentives on closings were down 40 bps sequentially. I was wondering if you could comment on incentives on orders, as well, how they progress during the quarter.

Matt Zaist -- President and Chief Executive Officer

Yeah. Mike, it's Matt. So I'll try to hit those generally in order. July, obviously, just ended.

We've got to audit our numbers. But I think, generally speaking, July looks to be up a bit year over year, which we feel good about following kind of a similar kind of cadence as we would expect as we move into the summer months, but seeing positive trends there. And I think, really, sales activity being pretty solid across each of our operating markets. As it relates to where we've seen kind of the best dynamics, I think, certainly, we've seen the most ability on a combination of reduced incentives, as well as pricing in those markets that we've seen the fastest absorption rate, so Texas, Colorado, as well as Phoenix, especially Phoenix on the entry-level side.

But I'd also note, on the positive side, Southern California, coastally, as we brought new communities online. They are at more obtainable price points, so we've seen improvement there.

Colin Severn -- Senior Vice President and Chief Financial Officer

That incentives on orders, Mike, are trending similarly to the closings, we kind of mentioned it on the last quarter, as well, in that 30 to 40-basis-point range.

Michael Rehaut -- J.P. Morgan -- Analyst

That's great. OK. So incentives on orders, similar trend as closing. That's helpful to know.

Just more maybe modeling-oriented questions. Just want to make sure I heard it right. The financial services, do you expect profit of $1.5 million to $2 million in 3Q and then $3.5 million to $4 million in 4Q?

Matt Zaist -- President and Chief Executive Officer

That's correct.

Michael Rehaut -- J.P. Morgan -- Analyst

So just trying to get a sense to extrapolate a little bit. What would that have been on kind of an annualized -- fully annualized rate for 2019? And will we just apply any growth to the overall business broadly to that number for 2020?

Matt Zaist -- President and Chief Executive Officer

Real quick, Mike. It's the Q4 number on financial service. Apologies, it's $3 million to $3.5 million, not $3.5 million to $4 million.

Michael Rehaut -- J.P. Morgan -- Analyst

OK.

Colin Severn -- Senior Vice President and Chief Financial Officer

Yeah, Mike, I -- maybe take the second half of that. If you think about that on a full-year run rate, look, I think, obviously, don't want to get too far out ahead. But I think it would be reasonable to expect again, as demand and backlog build throughout the year. And obviously, the pull-through on closings, you would expect to see kind of quarterly progression in the profitability of financial services.

So our expectation, again, next year is to have some incremental growth and certainly be able to improve capture rate on a wholly owned basis. So I think if you look at Q3 as an example, I think we are -- while we have wholly owned, we're transferring backlog and pipeline. I wouldn't necessarily use Q3 this year as a perfect quarter, but I think you can extrapolate that we would anticipate on a normalized basis that financial services would be somewhere in that $2 million to $4 million a quarter as we look at next year. And I think if you wanted to use a run rate, I think, somewhere in the $12 million to $13 million range would probably be a good starting point.

We'll update you more as we get specific results kind of pulled through once we've got it all consolidated.

Michael Rehaut -- J.P. Morgan -- Analyst

OK. Thank you so much. One last one, if I could. I appreciate the guidance on the gross margins for the third quarter.

Should we expect, just based on how your backlog is shaped up, further improvement similar or even a greater amount of sequential improvement in the fourth quarter? And any early thoughts based on your land positions and plans for 2020? How should we think over the next two, three, four quarters for that metric?

Matt Zaist -- President and Chief Executive Officer

Yeah, look, I think we do expect to see sequential improvement in Q4. I think as we look dead ahead to 2020, a couple of things that we've got that I think are positives. Look, obviously, we did an acquisition last year. And through that process, you revalue all the assets associated with an acquisition.

And I think we've stepped up the basis on the lots that we put on our balance sheet in both the Inland Empire and Austin. I think if we continue to amortize through those lots that were part of the transaction and bring on new lots, I think we see those being at better gross margins in both of those divisions. So I think we would expect to see building into Q4 and then, obviously, year-over-year improvement as a result of that. The other thing, as we've talked about previously, is Northern California.

It hasn't been a big contributor for us, just as we kind of had the gap between Bayshores and SoHay. So I think that will be a meaningful benefit to the company as we move into 2020, as well.

Michael Rehaut -- J.P. Morgan -- Analyst

Thank you.

Matt Zaist -- President and Chief Executive Officer

All right. Thanks, Mike. Appreciate it.

Operator

Thank you. Our next question comes from Jay McCanless from Wedbush. Please go ahead.

Jay McCanless -- Wedbush Securities -- Analyst

Hey, good morning, everyone. First question, just going to see if there's any update on the Lyon's family effort to increase the stock price and all the things that we discussed in Q1 of -- Q1 '19?

Matt Zaist -- President and Chief Executive Officer

Yeah, Jay, it's Matt. Look, at the time of the announcement of the 203 Waiver in May, the company, as well as Bill, issued some public comments behind the waiver in both our press release and on our earnings call, and obviously, Bill added this 13D amendment. As has been kind of our policy, we don't comment on possible transactions unless required to do so and wouldn't intend to update the market until we had something to say. So I'll kind of leave it at that.

Jay McCanless -- Wedbush Securities -- Analyst

OK. Just wanted to see if there were any changes there. And then the second question I had is, you talked about Northern California about getting that online. When should we expect that to start contributing to orders and closings? And then also, just on Oregon, are there any acquisition opportunities? Anything there where you can maybe accelerate your land pipeline a little bit?

Matt Zaist -- President and Chief Executive Officer

So as it relates to SoHay, we're in the presales mode right now, so we do have some orders that are coming through. It's -- we've got three different attached products, and attached product is a little bit challenging to sell on a presale basis. But we've got our first furnished models that will be completed in August, so later this month now, I would say. And then the two others in the fourth quarter, and so we should expect to see more benefit associated with that if we continue to move through the balance of this year.

We are expecting to get some closings out of it in the fourth quarter, just not as many as we had originally anticipated, but we'll get a full year of run up there in 2020. As it relates to Oregon, look, I think we are looking at everything we can do to kind of get that division performing better along with kind of our historical expectations. And to the extent our delivery volume is going to be different than it's been historically. We would look at resizing our total lot pipeline to make sure that we've got the right number of forward lots in that market.

But I would say, I think, getting some of the more affordable product back online is a huge key to us. And I would expect to do so later this quarter. So I think we're going to make sure we've got all of our products in the marketplace at each of our master-plan communities and make sure we've got a perfect kind of pulse on total consumer demand before we pull the trigger on asset sales up there.

Jay McCanless -- Wedbush Securities -- Analyst

Got it. And then one other. And I appreciate all the color you all have been giving us on fiscal '20. In terms of an average closing price or where -- don't want specific guidance, but with the disparity in price points you guys are selling at, geographically, just wondering if you all maybe have a forecast or -- I mean, not a forecast, but maybe a range we could think about as we start to playing out fiscal '20 because, again, you all just -- you all have so many different price points and they are all over the map.

So would love to hear you all thoughts on that where you think the ASP might go in '20?

Matt Zaist -- President and Chief Executive Officer

Jay, I think, if you look at kind of the year over year on ASP, I think you can use somewhere between kind of what our full year is this year as a good starting point on ASP. Obviously, I think the only thing that we -- while we get more out of Northern California next year, we also start to bring Houston online. So that's going to counterbalance each other. So I think we don't see a big difference this year's full-year ASP into next year.

Jay McCanless -- Wedbush Securities -- Analyst

OK. Sounds good. Thanks for taking my questions.

Matt Zaist -- President and Chief Executive Officer

All right. You bet, Jay. Thank you.

Operator

Thank you. [Operator instructions] Our next question comes from Alex Barron from Housing Research Center. Please go ahead. If you have your phone on mute, please unmute your line, sir.

Alex Barron -- Housing Research Center -- Analyst

Yes, thanks. Hope you guys are doing well. I was just trying to get a sense for how you guys see the SG&A trending into next year? Do you think you'll get further leverage here? Or do you -- is there a reason to expect maybe it will stay at similar rates as you invest in further communities and stuff?

Matt Zaist -- President and Chief Executive Officer

Alex, it's Matt. I think Colin kind of highlighted that the investment that we've made in financial services and kind of getting Houston going on an organic basis, it's been about 40 basis points of headwind over the trailing 12 months to SG&A. I think, obviously, we're going to get full year financial services benefit next year, and Houston will come online next year with really revenues in the back half of the year. So I think -- I don't know that we'll get full benefit of all that SG&A leverage next year, but we would certainly get the financial services leverage, and at least, half of that leverage back in Houston.

So I think if you took that 40 basis points, somewhere between 20 and 30 basis points would be a reasonable recap just on those two segments. But I don't think we're ready to give a full picture for the full-year SG&A yet.

Alex Barron -- Housing Research Center -- Analyst

And then some builders have kind of made some announcements about entry into kind of like single-family build-for-rent type opportunities. Is that something you guys have looked into or thinking about?

Matt Zaist -- President and Chief Executive Officer

Yeah. I think right now, we're really primarily focused on continuing to improve our core homebuilding operations on a for-sale basis. Occasionally, we've had small sales to single-family rental operators, but I think we've got enough that we're doing relative to growing and bringing online the community count growth that we have ahead of us, as well as integrating financial services. So that -- those are our priorities right now ahead of exploring that business.

Alex Barron -- Housing Research Center -- Analyst

All right. Sounds good. Thanks.

Matt Zaist -- President and Chief Executive Officer

All right. Appreciate it, Alex.

Operator

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back to Matt Zaist, president and chief executive officer, for closing remarks.

Matt Zaist -- President and Chief Executive Officer

All right. Well, I'd like to thank you all for joining our call today. We look forward to speaking with you next quarter. Have a great one.

Operator

[Operator signoff]

Duration: 48 minutes

Call participants:

Larry Clark -- Investor Relations

Bill Lyon -- Senior Vice President and Chief Financial Officer

Matt Zaist -- President and Chief Executive Officer

Colin Severn -- Senior Vice President and Chief Financial Officer

Alan Ratner -- Zelman and Associates -- Analyst

Michael Rehaut -- J.P. Morgan -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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