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Edited Transcript of TPH earnings conference call or presentation 31-Oct-19 2:00pm GMT

Q3 2019 TRI Pointe Group Inc Earnings Call

Irvine Nov 18, 2019 (Thomson StreetEvents) -- Edited Transcript of TRI Pointe Group Inc earnings conference call or presentation Thursday, October 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Martin

TRI Pointe Group, Inc. - Head of IR & VP of Finance

* Douglas F. Bauer

TRI Pointe Group, Inc. - CEO & Director

* Michael D. Grubbs

TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer

* Thomas J. Mitchell

TRI Pointe Group, Inc. - President & COO

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Conference Call Participants

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* Alan S. Ratner

Zelman & Associates LLC - MD

* Alex Barrón

Housing Research Center, LLC - Founder and Senior Research Analyst

* Carl Edwin Reichardt

BTIG, LLC, Research Division - MD & Homebuilding Analyst

* Jay McCanless

Wedbush Securities Inc., Research Division - SVP of Equity Research

* Michael Glaser Dahl

RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products

* Stephen Kim

Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team

* Truman Andrew Patterson

Wells Fargo Securities, LLC, Research Division - Associate Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to the TRI Pointe Group's Third Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Martin, Investor Relations. Thank you. You may begin.

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Christopher J. Martin, TRI Pointe Group, Inc. - Head of IR & VP of Finance [2]

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Good morning, and welcome to the TRI Pointe Group Earnings Conference Call. Earlier today, the company released its financial results for the third quarter of 2019. 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 the call begins 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 accessed 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; Tom Mitchell, the company's Chief Operating Officer and President; and Glenn Keeler, the company's Chief Accounting Officer. With that, I will now turn the call over to Doug.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [3]

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Thanks, Chris. Good morning, everyone, and thank you for joining us today as we go over our results for the third quarter of 2019 and update you on our next-gen strategy and discuss current market trends. TRI Pointe Group delivered strong results and had an outstanding third quarter as we exceeded our stated guidance for deliveries, average sales price, gross margins and SG&A leverage. We continue to see improvements in our business from our focus on operational efficiency, including our 12-point sales and marketing objectives. Order trends remained positive in all our markets, with strong momentum throughout the quarter as evidenced by a 25% year-over-year increase driven in part by an 8% improvement in absorption rate. The combination of lower mortgage rates, elevated consumer confidence and tight existing home supply has created a favorable environment for our industry.

TRI Pointe Group has taken advantage of this positive backdrop with our premium brand strategy that focuses on design, innovation and the customer experience to differentiate ourselves from the competition while providing value to our customers. We also made further progress during the quarter in our efforts to grow and diversify our business from both a geographic and product offering standpoint as part of our next-gen strategy with a goal of $6 billion in annual revenue. A large component of that growth will come from increased volume and market share in all of our existing markets. This will be augmented by entering new markets through either organic expansion or M&A.

In California, we continue to leverage our long-term legacy land position with a number of new communities that offer multiple price points and product segments. Our new land purchases complement our existing pipeline and our focus on core locations with affordable price points. As we look at our California operation and the results, we continue to be encouraged with our position in this high demand market. In 2019, over one-third of our deliveries were priced below $500,000 and over 2/3 were priced below $750,000. Given the diverse nature of the California economy, high demand/low supply markets and our unique design offerings, we expect to see continued long term success in the state.

Outside of California, we remained committed to increasing the size and scale of our operation, targeting the top 10 market share in each market. We continue to invest in developing our presence in early-stage markets as they begin to make a positive contribution to the bottom line. Specifically, our current focus is on growth in the Carolinas and Texas. We believe these states will have significant future growth that will fuel and further diversify our company. Our teams in Raleigh and Charlotte have done an outstanding job building relationships and controlling new land positions. We now own or control 845 lots, which represents 14 future communities, the first of which will open in the third quarter of 2020. With our acquisition of a builder in the Dallas-Fort Worth market in December 2018, Trendmaker delivered 610 homes in 2018 from our 3 Texas divisions.

With the proven operation in Houston and our new teams in Austin and Dallas-Fort Worth, we are poised for growth. Our strategic goal over the next 3 to 5 years is to deliver 1,800 homes annually from the State of Texas. In addition, we are actively looking at M&A opportunities in select markets. To that end, we have promoted Mike McMillen, a long time TRI Pointe Executive to lead our efforts. We will continue to apply our disciplined approach while maintaining a strong balance sheet and liquidity as we execute on our long-term growth strategy through either organic expansion or M&A activity.

We believe the long-term outlook for the housing industry supports our growth objectives. The millennial cohort is entering into its prime home buying phase of their lives. And aging baby boomers are looking to downsize in amazing numbers. This presents a compelling opportunity for increased housing.

Nationally, the rate of new home construction remains below the historic trend line, which suggests that the industry is not keeping pace with household formations, and much of the existing home supplies in need of replacement. The opportunity is even more pronounced in our markets which highlights several of our key drivers of new home construction, including an increase in household formation, above-average job growth and overall quality of life. In light of these positive factors, we believe the outlook for our industry and particularly TRI Pointe Group is bright.

Now some quick market color. We experienced another quarter of strong demand in California with orders up 26% compared to the prior year and a monthly absorption rate of 3.4 homes per community. Our San Diego Inland Empire and LA County projects continue to perform well. In Northern California, the market has rebounded nicely and we experienced a 36% year-over-year increase in absorption rate, thanks in part to our strategic shift to more affordable locations east of the core Bay area into places such as Solano and East Contra Costa County. We are extremely pleased with our team's first project in Sacramento and are excited to open our next 2 projects in December.

In Seattle, we saw a nice year-over-year uptick in our monthly absorption rate, to 3.3 homes per community as the market has found its footing after a period of softness in 2018. While the market remains challenging at the high end, we have recently introduced several new communities which have been well received at pricing below $750,000. The Phoenix market has been our strongest market and remained positive throughout the quarter. Orders were up 60% for the quarter on a 15% increase in our monthly absorption rate driven by healthy market dynamics and well-located communities. We are well-positioned to continue our growth in this market with several new communities slated for 2020 and beyond.

Our operations in Las Vegas continue to improve, demonstrated by an increase in their monthly absorption rate to 3.4 homes per community, compared to 3 in the prior year. We continue to be opportunistic while focusing more on the entry-level buyer segment, with the recent introduction of 2 affordable communities with starting price points ranging from the high 200s to the mid 300s. Overall, we have an excellent land position for 2020 and beyond. We remain bullish on the long-term outlook for Denver, as the market continues to attract employers that provide good, high paying jobs.

Demand remains strong in our current projects with price elasticity that helps improve margin. We are expanding our presence in the entry-level and first time move-up segment, focusing on our land acquisition efforts on projects with average sales prices under $500,000. As I mentioned earlier, our Trendmaker brand in Texas will factor heavily into our growth plan. Houston, Dallas-Fort Worth, and Austin are 3 of the biggest home building markets in the country. And we believe we can grow our volumes into a top 10 market share. Our Houston division has been successful rolling out new home designs which has helped increase our monthly absorption rate by 17%. Our Austin division has similar success driving their monthly absorption rate to 3.2 homes per community, compared to 2.2 in the prior year.

Lastly, our Dallas-Fort Worth acquisition has been fully integrated into our systems and our land team has been busy acquiring and controlling over 500 additional lots, focusing on bringing new homes to the market at average sales prices under $350,000.

Finally, at our Winchester Homes brand in the Mid-Atlantic, our operations have started to improve. We experienced a sizable year-over-year improvement in our monthly absorption rates to 3.4 homes per community, compared to 2.5 in the prior year. Our recent new home offerings have been well received, a good sign that our ongoing new home design repositioning will continue to drive future success.

With that, I'll turn it over to Mike for more details on our results this quarter. Mike?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [4]

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Thanks, Doug. I would also like to welcome everyone to today's call. I'm going to highlight some of our results and key financial metrics for the third quarter, and then finish my remarks with an update on our expectations and outlook for the fourth quarter and full year 2019. At times we'll be referring to certain information from our slide deck posted on our website that Chris mentioned earlier.

Slide 6 of the earnings call slide deck provides some of the financial and operational highlights from our third quarter. Our home sales revenue was $746 million for the quarter on 1,187 homes delivered at an average sales price of $629,000. Our homebuilding gross margin percentage for the quarter was 22.6% and our SG&A expense as a percentage of home sales revenue was 11.6%. Net income came in at $63 million or $0.44 per diluted share.

As for our overall selling communities, during the third quarter, we opened 15 new communities, 3 in California, 3 in Texas, 2 in Maryland and 2 in Virginia, 2 in Nevada, 2 in Washington and 1 in Arizona. We closed 11 communities resulting in an ending active selling community count of 150. Our active selling communities at the end of the quarter are shown by State on Slide 7. For the quarter, net new home orders increased 25% on a 16% increase in average selling communities. Our overall monthly absorption rate of 2.9 homes per community was an increase of 8% compared to the same quarter in the prior year. Our new home orders are shown by State on Slide 8, and you can see the historical monthly cadence of orders on Slide 28. So far through today, October orders are up 45% year-over-year.

We ended the third quarter with 2,312 homes in backlog, up 10% from last year. Our average sales price in backlog was $645,000 for a total dollar value of $1.5 billion, an increase of 4%. Our backlog dollar value is shown by State on Slide 9. During the third quarter, we converted 54% of our second quarter ending backlog delivering 1,187 homes at average sales price of $629,000 resulting in home sales revenue for the quarter of $746 million.

Approximately 42% of our deliveries for the quarter came from California, including 29% from our long-term California assets. Our new home deliveries are shown by State on Slide 10 and home sales revenue by State are shown on Slide 11. Consistent with our comments on previous earnings calls about the growth of our margins in the back half of 2019, our homebuilding gross margin percentage for the third quarter improved 130 basis points to 22.6% compared to the same quarter last year and improved 560 basis points sequentially from last quarter.

The sharp increase in our homebuilding gross margin for the quarter was primarily due to delivering a higher percentage of homes in California, and more specifically, a higher percentage of homes from our long-term California assets, both of which yield margins well in excess of the company average.

For the third quarter, SG&A expense as a percentage of home sales revenue was 11.6%, a 90 basis point increase compared to 10.7% for the same period last year, but improved 50 basis points sequentially from 12.1% last quarter. The year-over-year increase in our SG&A percentage was due to a decrease -- as a result of our 3% decrease in home sales revenue and higher overhead costs as a result of our expansion initiatives into the Carolinas, Sacramento, Austin and Dallas-Fort Worth markets.

During the third quarter, we invested a $112 million in land acquisition and $89 million in land development. Year-to-date, we have invested an aggregate combined total of $523 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 2022 and beyond. At quarter-end, we owned and controlled approximately 28,500 lots, which represents 5.9 years of supply based on our last 12 months of delivery. A detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q, which will be filed later today. In addition, there is a summary of lots owned or controlled by state on Page 27 in the slide deck.

Turning to the balance sheet, at quarter end, we had approximately $3.3 billion of real estate inventory. Our total outstanding debt was $1.4 billion resulting in a ratio of debt to capital of 40.4% and net debt to net capital of 38.2%. We ended the quarter with $549 million of liquidity, consisting of $130 million of cash on hand and $419 million available under our unsecured revolving credit facility. During the quarter, we repurchased a little over 3 million shares of our common stock at a weighted average price per share of $13.75 for a total dollar amount of $42 million. We have approximately $58 million remaining available from our $100 million share repurchase authorization.

Now I'd like to summarize our outlook for the fourth quarter and full year 2019 as shown on Page 24 and 25 of the slide deck. For the fourth quarter of 2019, the company expects to end the quarter with 10 fewer communities as a result of our strong absorption rate in the second and third quarters, resulting in 140 active selling communities as of December 31, 2019. We expect our active community count to be back up in the 150 range by the end of the first quarter as we plan to open over 20 new communities during the quarter and over 60 communities for the full year 2020. The company anticipates fourth quarter deliveries of 73% to 77% of its 2,312 homes in backlog as of September 30, 2019, resulting in full year deliveries between 4,800 and 4,900 homes.

The company expects its average sales price to be $620,000 for both the fourth quarter and the full year 2019. The company expects its homebuilding gross margin to be in the range of 20.5% to 21.5% for the fourth quarter resulting in a full year homebuilding gross margin to be in a range of 19% to 20%. The company expects its SG&A expense as a percentage of home sales revenue will be in the range of 9.2% to 9.6% for the quarter, resulting in a full year SG&A expense in the range of 11% to 12% of home sales revenue. And then lastly, the company expects its effective tax rate to be in the range of 25% to 26%.

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

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [5]

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Thanks, Mike. In conclusion, I'm very pleased with our results this quarter. Again, we exceeded our stated guidance in all of our key operational metrics for the quarter and are poised to deliver on our original full-year guidance that we gave at the beginning of the year. We posted a 25% increase in overall new home orders, which includes a 26% increase in orders in California. We also made further progress towards our goal of growing TRI Pointe Group into a stronger and more diversified homebuilder. Our quality home, customer experience and customer satisfaction continues to drive referral sales. We remain confident in our outlook for the homebuilding industry, as well as our company's balance sheet and liquidity. Our top-tier management teams have us well-positioned to focus on growing our business while maintaining the flexibility of a modest leverage structure and opportunistic share repurchases over time.

In closing, I want to thank all of our TRI Pointe Group team members on an excellent quarter while remaining steadfast in bringing the year towards a successful close. That concludes my prepared remarks and we'll be happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Alan Ratner with Zelman & Associates.

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Alan S. Ratner, Zelman & Associates LLC - MD [2]

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Congrats on the strong results and good quarter. Doug, I guess first question most importantly, wanted to just check-in and see how you and the company and employees are doing with all these various fires in California and less importantly whether there has been any impact to operations as a result of that?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [3]

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I'll take a quick crack at it and Tom's here, too -- first of all our thoughts and prayers are with all the firefighters and families affected. We actually had a young Assistant Superintendent affected from one of the earlier fires a couple -- about a month ago, but he and his family are doing fine. As far as our operations, they have not been affected. PG&E up in Northern California has always been notorious in setting their meters. So I don't think anything has changed in the 30 years that I've been doing this business in California. But fortunately for all our communities, everything is okay and our people are most importantly are okay and just our thoughts and prayers are out with everybody. Unfortunately, California has got fires and the rest of the world has got hurricanes and tornadoes and other things like that. So hopefully, we can move on and get some better weather systems coming through the area.

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Alan S. Ratner, Zelman & Associates LLC - MD [4]

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I appreciate that. And good luck with everything there. Second question, you have really strong margin performance this quarter and obviously, some of that was mix, but it seems like it was even a bit stronger than you guys were anticipating. I was hoping maybe you could just talk a little bit about what you're seeing in general on the margin front, maybe looking at the portfolio, excluding the long-dated California assets. What has the trend been there and what does it look like in backlog? And I guess just more broadly heading into 2020 should we expect a similar year of volatility in terms of the mix from these communities, or do you think you're entering a point now where the flow-through should be a little bit more consistent or stable from quarter-to-quarter?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [5]

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We certainly do see that -- a lot less volatility moving forward into 2020 as California has obviously had better sales. That's what really drives our margins, more so. When you look at margins in general I mean, California is typically about 24% and margins outside of California around 16% right now. That historically has been a little bit higher just because of the additional incentives, a couple of hundred basis points of additional incentives that we saw this year from the back end of last year, as well as the early part of this year, has brought those margins down outside of California. But we are seeing improving conditions in most of those markets outside of California. Clearly, our margin being 22.6% this quarter, a lot of that was related to pulling forward more of the long-term California assets into the quarter, even more specifically PHR. I think we've highlighted before those margins are north of 30%. But we do see a little bit more consistent trend in the fourth quarter, first and second. At least what we see in our backlog right now for margins moving forward.

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Alan S. Ratner, Zelman & Associates LLC - MD [6]

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That's very helpful, thank you for that, Mike. And then if I could just squeeze in one last one. You guys mentioned that the product mix change if you will, your more dense product, smaller more affordable product. I'm just curious as you kind of look at these communities as they're opening up or as the product is introduced. Are you actually seeing a shift in the composition of your buyers? Are you seeing -- whether it's lower-income, younger buyers or is this more just a function of the same buyer pool, but perhaps just attracting more of those buyers to your communities and kind of stealing those from other builders or the existing market?

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [7]

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Alan, good question. It's Tom. Certainly, we have not seen a significant shift in our buyer pool. Demographics remain fairly constant from prior years, but we are seeing a continued interest in a younger buyer segment. And so we are anticipating going forward that that is going to be an expanding makeup of our demographics.

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Operator [8]

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Our next question comes from the line of Stephen Kim with Evercore ISI.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [9]

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Good quarter. A few things, so just a follow-up if I could on Alan's question about the margins and the impact of California and outside California. You mentioned that as you go forward here over the next few quarters, margins could be a little more sustainable. I think you attributed that to the fact that the California-related demand is strengthening. It seems I guess you're saying to a level that would allow you a more sustainable share of California deliveries. I just want to make sure I got that right. And then I wanted to ask about the non-California. You mentioned that there was incentives that were elevated. Is there a trend there that you anticipate towards diminishing incentives that would allow the margins to move up from the 16% rate in the near term or is that something that we'll just have to wait and see on later into 2020?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [10]

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Stephen, this is Mike again. Incentives, in general, were up about 200 basis points year-over-year for the quarter and kind of year-to-date for the company on deliveries. That was my comment related to incentives. We have seen incentives trending down. They're down about 20 basis points this quarter over last quarter on deliveries and we see that trend continuing. As it relates to California, margins are down a couple of hundred basis points in California, just like they are in our outside markets. So it wasn't incentives only outside of California. So we've seen that consistent trend. But we do see California and the long-term California assets delivering a more consistent pace, if you will, into 4Q, 1Q and 2Q. And that's why we think our margins are more representative of kind of the full-year range.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [11]

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In addition, I'd add, Stephen, that for the divisions outside California as we look at our backlog and orders in certain markets, we've seen -- it will continue to see slight improvement in their margins over the next year or 2 as we continue to grow those divisions and they create more operational efficiencies.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [12]

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All right. Embedded in that, is there any assumption that some of the new areas like close to my heart, North Carolina would come in at a higher than average margin for the outside of California part of your business? In other words, higher than the 16% level or would there be, what people used to call a dumb tax? Get in there and initially you kind of get a lower margin?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [13]

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Well, we do underwrite through an 18% to 20% margin. I guess we'll find out if there is a dumb tax when we actually start delivering houses there. But right now our full expectations is that our margins would be significantly above that 16% in Carolinas as we start delivering homes.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [14]

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And I think to answer the dumb tax question which is the good term. That's a function of, in my mind the operating team and we've got a very strong team in the Carolinas. So I'm not anticipating much in, as you call it dumb tax and we are targeting margins north of 16% and we continue to underwrite deals 18% to 22% and higher depending on the risk profile of the asset and what we've got to deliver. So we're pretty optimistic about the Carolinas. Texas is also going to be a big growth market of ours. So we're going to see continued returns -- increase in returns over the next several years as we expand into those markets that require less capital to return capital more efficiently.

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [15]

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Sorry, Stephen. It's Tom. Just to add on one thing to that. In general, as we are opening new projects and bringing new projects into the marketplace, we expect a better margin profile than that 16%.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [16]

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Great. No offense to a grand team. That dumb tax expression is a holdover from Bob Paul from years ago. The last one for me, related to opening up these next round of communities, your land spend has been pretty moderate for a while and I'm wondering whether or not the rate of land spend, not in absolute dollars, I think of it as a run rate of your deliveries or revenue, but relative to the size of your sales let's say, should we be thinking that this is a level of land spend that you can sustain? Or, is it your anticipation that you're going to look to invest a higher level as you go forward to fund a greater acceleration in community count?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [17]

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Yes, it's a great question, Stephen. This is Mike again. This year we're around $800 million to $900 million, I think our original guidance was probably $900 million to roughly $1 billion at the beginning of the year. But as you can imagine, coming off the heels of the last 6 months, last year, we didn't tie up a lot of land at that point in time. So land spend is down this year comparatively to what we think it might be in 2020 and 2021, as we have expectations to grow, as Doug mentioned as part of the next-gen, you'll see us spending more money in land spend moving into 2020 and 2021.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [18]

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But as we spend money on land development, we're very cognizant of the balance sheet, focusing in on positive cash flow, keeping all our levers open to us. So we are actually quite blessed with the long-term assets that generate a lot of cash flow for the company, even though they're sitting out there and they're slowly generating cash flow. It's in earnings, I should say, the cash flow is very strong, so that helps our growth pattern for the next several years.

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Stephen Kim, Evercore ISI Institutional Equities, Research Division - Senior MD & Head of Housing Research Team [19]

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Good job on the quarter.

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Operator [20]

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Our next question comes from the line of Truman Patterson with Wells Fargo.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [21]

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Nice results. First, I wanted to touch on your SG&A ratio. It's been increasing as you've expanded into Charlotte, Raleigh, Sacramento and DFW. How long do you think it will take for these markets to mature where you could start seeing some SG&A leverage? Or, at the same time, do you think that you'll continue expanding into new metros and that SG&A ratio will continue ticking up?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [22]

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Yes, good question, Truman. I think we've probably maybe have talked about this. But in an organic startup nature, we haven't given any guidance for 2020 but I can tell you generally speaking, in an organic start-up you're going to lose money for the first 2 years, and then year 2 you breakeven, year 3 you breakeven, then year 4 and 5, you start generating more profit, it starts leaning out. That's an organic model right there. And that's pretty consistent. And so, that does obviously weigh on our SG&A for the next couple of years, just because we're intentionally growing both organically and through some acquisitions. So that's the way I would look at it. Mike, if you want to add.

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [23]

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Well, I'd just say that the post ASC 606, our expectations down the road on SG&A would probably be in that 10.5 to 11.5 that was probably 9.5 to 10.5 prior to ASC 606. That added about 100 basis points up in the sales and marketing category. But those expectations wouldn't be achieved probably till we start delivering units from those expansion markets right now. So it's not going to be next year, let's put it that way, maybe the high-end of that range will, not certainly the low end of that.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [24]

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Okay. And then, you've discussed a few points on this call about your effort to bring down prices in several markets. Could you guys just elaborate on that a little bit further, which markets you're actually going down the price structure, if you will? And does this mean that you're rotating more towards the entry-level product?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [25]

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Well, our mix right now is about 30%, 31% entry-level, 50% for a second time move up, 15%-16% luxury and the balance, active adult. What naturally happens, whether we build entry level in the Inland Empire, or as we push east, Truman, to the markets of Dallas and the Carolinas, and an even markets of California, where we build higher density solutions, our entry level percentage over the next several years will slowly grow. I haven't gone through and factored it exactly out 5 years from now, or 4 or 5 years, but it's definitely going to be greater than 30. It probably could approach 35%-40% in the end, as we continue to push forward. And really, it's still focused on our premium brand strategy, call it premium brand plus from the entry level, first- and second move up. Our active adult business is also growing. So those percentages will be shaved.

The only luxury that we really have is down in PHR and that goes out for another couple of years, but we're well-positioned and even in California as we pointed out, 2/3 of our deliveries are under 750. Actually, I know for people in Carolina, that's an entry level price point for California for most people. So we are continuously working on higher density solutions, especially in the infill markets in California, DC and other areas like Seattle, while also pushing on smaller product, more efficient product to hit the more affordable price point.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [26]

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Okay. And then just following up on the order incentives. I believe you said that they were down 20 bps quarter-over-quarter. Do you have the number in front of you what that was down year-over-year?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [27]

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The incentives for this year, year-to-date is 5.4% and that's on delivery. And it was 3.4% last year in 2018 year-to-date for the 9 months.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [28]

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I was hoping, on the order side, if you can give what was down year-over-year?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [29]

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It's roughly down about 180 basis points.

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Truman Andrew Patterson, Wells Fargo Securities, LLC, Research Division - Associate Analyst [30]

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Okay, great.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [31]

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And then, just to talk about that but option revenue, at the same time option revenue is actually up year-over-year about 90 basis points. A lot of times we're giving away options as part of the incentive package. So that kind of offsets some of that basis points decrease.

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Operator [32]

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Our next question comes from the line of Mike Dahl with RBC Capital Markets.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [33]

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I wanted to follow up on partially on one of Steve's questions and then, on a comment that was made around community count in the opening remarks. Understanding it's an incredibly hard metric to forecast out with any certainty, but it sounds like to the extent that you slowed land spend, it's not going to be an impact on 2020 necessarily, but potentially you'll have to fill in for '21 and beyond. I guess with the 60 communities slated to open next year, could you give us some sense of cadence around that? And to your best guess, if we're traveling in this absorption around 2.9 or a little better, what should we expect in terms of close out? So effectively, just cadence of net community count growth as we make our way through next year?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [34]

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Mike, perhaps answers the community count question. As we pointed out in the earnings call, we're in pretty good shape for both 2020 and 2021. Our land acquisition efforts are really for '22 and beyond.

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [35]

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Yes, it's Mike. So the cadence is relatively flat, next year. So it's a pretty good number of communities on a quarterly basis. 1Q is obviously a larger quarter for us. We're opening 20 plus communities in that quarter. We think that our communities, end of year, will be up about 4% to 5% year-over-year.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [36]

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Okay, that's helpful. And then, the follow-on question is just looking for a little more clarity around the comments on margins and the normalization based on the mix of California, which obviously should be less lumpy moving forward than it has been this year. But given the puts and takes that you've outlined already, I think the plan has still been for the mix of long-term deliveries on long-term California land to increase year-on-year in '20 versus '19, which would still argue that the margin trajectory should be heading north. So when we're talking about stabilization or normalization of margins, is it in the 19% to 20% range that we should be thinking about? Or given that mix dynamic that you have over I think next year and the year after, is there still potential for higher than that?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [37]

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Well, there is always potential for higher margins, given market conditions. But I mean, right now we're just giving guidance on the full year this year at 19% to 20%, but you can probably see as California has picked up, the trajectory should be on the positive side of that.

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Michael Glaser Dahl, RBC Capital Markets, Research Division - MD of U.S. Homebuilders & Building Products [38]

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Is it fair to still think about 2020 and 2021 as still having a plan that includes a higher percentage of deliveries on the long-term land?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [39]

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Yes, it's a moderate higher percentage on long-term assets.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [40]

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It's fairly consistent, it's not a material difference.

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [41]

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Percentage of units in California might be higher, but for the company in total, since we are growing outside of California, is probably the same percentage.

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Operator [42]

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Our next question comes from the line of Jay McCanless with Wedbush.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [43]

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First question I have is around pricing power. We've heard numbers all over the match. I'm sure your competitors would love to hear what kind of pricing power you're getting it on entry level as well as move-up communities?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [44]

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Well, pricing power overall are really market specific. Jay, we've had more pricing power in markets like Phoenix, ranging from anywhere from 2% to 4%, but the entry level, move up, luxury segment, all those markets have had various puts and takes. I would categorize this, about 40% of our communities had some sort of pricing power this year, year-to-date. But that's also net effect, our pricing is offsetting any cost increases, whether it's labor or materials.

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [45]

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This is Tom. I'd add, it's fairly stable throughout most of our operations. We have seen a slight reduction of incentives on the year as we've gone forward, but pricing seems to have been stabilized.

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Jay McCanless, Wedbush Securities Inc., Research Division - SVP of Equity Research [46]

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And that, actually, is going to be my next question; just want to see what you're seeing from competitors. Year-end, everyone trying to close out some extra homes. But are you seeing a level of incentives in the market for any price point, that's above what you would normally see at this time of year?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [47]

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No, again, fairly stable.

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Operator [48]

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Our next question comes from the line of Carl Reichardt with BTIG.

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Carl Edwin Reichardt, BTIG, LLC, Research Division - MD & Homebuilding Analyst [49]

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I want to ask about specs. First, what are you running in terms of under construction and finished specs per community now? And then, spec strategy too, you've got some peers out there who are running now 30-40 houses ahead of demand, with finished back and others who are just pricing basis super low and trying to make up numbers on options. So how do you look at your spec strategy and recognizing it's different California to Texas, especially at the entry-level?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [50]

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We have just some numbers, we had 295 completed homes at the end of the quarter. That's roughly 2 per community and we had been running probably 3 in the previous quarter. So we've kind of worked down on our specs, so that's why [we] may be the opposite. Our range on our guidance of deliveries didn't move a whole lot for that reason, because there wasn't a lot of units that we had, that we could sell and close within the quarter, really more so building backlog. Doug or Tom, you want to talk about specs strategy?

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [51]

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I would add on that. We're not going to be a company that's going to run out a bunch of specs, because we offer more of a personalization to our product offering. Numbers of specs per community will probably, I mean, it's a little low right now too, but it'll probably range around 3 to 4, going forward in the future. Because again, as part of our premium brand strategy, we want to give that personalization to our buyers, whether it's entry-level, all the way up to active adult and luxury.

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [52]

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Thanks, Tom. And then, let's go to Banning for a second. Last quarter, I think you've got 4000 plus lots there and I think you in the quarter you said you'd start delivering houses in 2020 there. Can you just give us an update on what kind of product you're planning on putting out there, given that's your largest contiguous land position?

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Thomas J. Mitchell, TRI Pointe Group, Inc. - President & COO [53]

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Yes, Carl. This is Tom. Banning development is going very well. We're on pace and we're scheduled to start our first set of models here shortly. And the product will be very consistent with what you see right across the street in Beaumont, we've predominantly got 5 different product segments that we're working through. It definitely skews towards the more affordable price point and there's great values out there, as you know. But if you just took a look at what we're offering in Sundance, it's basically updated versions of that.

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Operator [54]

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(Operator Instructions) Our next question comes from the line of Alex Barrón with Housing Research Center.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [55]

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I was wondering if you had any way to break down how the orders have been improving by price range? Like you said, you have a third entry level, I guess 50% move up and the rest more luxury and active adult. Do you have anything you can offer as far as how those different segments grew year-over-year?

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Michael D. Grubbs, TRI Pointe Group, Inc. - Co-Founder, CFO & Treasurer [56]

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Yes, Alex, it's Mike, I can give you some stats on that. When you looked at -- Doug talked about entry level was 31% of our order mix, absorption rate was 4.1% on the entry-level products. On move up, it was about 50% of our mix and absorption was 2.7% for the quarter. Luxury was 15% and it was 2.4% and then, our active adult was 4% of our market overall orders and it was 2.1% on the absorption rate. When you compare that to year-over-year, obviously, it's an easier comp, that last third quarter was relatively weak. Just running down, entry was 3.5, move up 2.5 last year, luxury was 2.6 and active adult was 2.7.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [57]

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Got it. That's very helpful, Mike. If we look within California, especially Southern California, are you seeing a pick up more in the coastal areas? I'm certain Inland has probably been picking up earlier, but I'm wondering what you guys been more inland versus coastal in Southern California?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [58]

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Alex, I would say, your comments with regard to Inland in the more affordable price points, picking up the most without a doubt. Northern California, particularly the Bay remains choppy and we have not seen the same level of increase relative to absorption and demand there. San Diego, our coastal market there, we've got a very unique offering and we have seen continued stabilized absorption there. In Orange County, LA, coastally with lower price points under $1 million, demand has been good. As you move up in price point, demand is a little softer.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [59]

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All right, very helpful. And how about which has been your best-performing market. Is that Arizona, I'm guessing?

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [60]

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Yes.

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Alex Barrón, Housing Research Center, LLC - Founder and Senior Research Analyst [61]

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Okay, great.

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Operator [62]

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There are no further questions in queue. I'd like to hand the call back to Doug Bauer for closing remarks.

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Douglas F. Bauer, TRI Pointe Group, Inc. - CEO & Director [63]

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Well, thank you. And I'd like to close with a thank you to my partner of 30 years. Mike is retiring on January 1st. We tip our cap to Mike and toast him with a glass of champagne (technical difficulty) taken to [many a river] in Utah. We will miss him and we wish him all the best and look forward to talking to you next quarter.

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Operator [64]

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