TRI Pointe Homes (TPH) Q1 2019 Earnings Call Transcript

TRI Pointe Homes (NYSE: TPH) Q1 2019 Earnings CallApril 25, 2019 10:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings and welcome to TRI Pointe Group's first-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to your host, Mr. Chris Martin, vice president of finance and IR.

Thank you. You may begin.

Chris Martin -- Vice President of Finance and Investor Relations

Good morning, and welcome to TRI Pointe Group's earnings conference call. Earlier today, the company released its financial results for the first 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 report 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 those non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be assessed through TRI Pointe's website and in its filings with the SEC.

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Hosting the call today is Doug Bauer, the company's chief executive officer; Mike Grubbs, the company's chief financial officer; and Tom Mitchell, the company's chief operating officer and president. With that, I will now turn the call over to Doug.

Doug Bauer -- Chief Executive Officer

Thanks, Chris, and good morning to everyone joining us on the call today as we go over TRI Pointe Group's results for the first quarter, discuss current market trends and update you on our long-term strategy. Overall, the housing market demonstrated great resilience in the first quarter of 2019, as demand picked up from the depressed level for the fourth quarter last year. Order activity improved as the quarter progressed, as our company recorded an order pace of 2.1 homes per community in January, 3.0 in February, and 3.7 in March. Our operations in California produced a similar sequential improvement during the quarter, with an order gain of 2.0 in January, 3.5 in February, and 3.9 in March.

We saw comparable trends across most of our markets, and as a result, orders for the quarter came in ahead of our internal projections, thanks in large part to our six premium lifestyle brands, lower mortgage rates and a favorable economic backdrop. Deliveries also came in ahead of our previously stated guidance despite experiencing some adverse weather conditions during the quarter. Homebuilding gross margins came in short of our expectations, largely due to $5.2 million of expenses related to lot option abandonments. We expect our gross margins to improve significantly as the year progresses and have left our full-year gross margin guidance unchanged at 19% to 20% on 4,600 to 5,000 deliveries.

The continued confidence we have in achieving our margin and delivery guidance for the year is due in part to the progress we've made with several of our initiatives we discussed in our last call, including our sales and marketing directives, lowering costs and increasing asset efficiency. Our sales and operational teams did an excellent job in the quarter, implementing the strategies from our 12-point sales and marketing plan, while focusing intently on lead conversion. Or procurement teams and department heads stepped up to the challenge of lower indirect costs by negotiating price concessions from a number of our vendors reducing our overhead and value engineering new and existing floor plans. These steps have planted the seeds of success to meet, and in some cases, exceed our margin expectations in a very competitive environment.

Our land acquisition teams were also successful in their efforts to rework the terms on several land deals in ways that should benefit our returns on future projects delivering homes in 2020 and beyond. At TRI Pointe Group, we are always striving for operational excellence, and focusing in on these initiatives will help us attain that goal. California continues to be a strong driver of our order success. In San Diego, we experienced strong demand at all price points as evidenced with a monthly absorption pace of 4.5 homes per community per month.

The Inland Empire warmed up during the quarter with an absorption pace of three homes per community per month at our entry level and first time move-up projects. The move-up segment in Orange County above $1 million continues to be spotty with less international buyers currently in the market. Last November, we introduced four new affordable programs at our Skyline Ranch community in Los Angeles. These entry level and first time move-up programs have been absorbing at a pace of four per month.

The Bay Area continues to be challenged at higher price points, but more affordable projects have bounced back nicely during the quarter. Our 10 new communities that opened during the quarter, generally combined absorption pace was 7.5 per month. We believe these results reflect our commitment to design in innovation and the execution by our operating teams that provide the premium brand experience at all price segments, which serves as a strong differentiator in our highly competitive industry. Another goal of our company is to steadily grow our operations through a combination of growth within our existing markets, expansion into new markets, and the continued development of our long-term California assets.

Each of these avenues of growth help contribute to an 11% year-over-year increase in active community count to end the quarter. To give you an update on some of our newer markets, we have made significant progress in integrating our recent acquisition in Dallas, and we look forward to growing our presence in this dynamic housing market. Our Greenfield expansion into the Carolinas is progressing nicely, and we anticipate opening our first communities in the first half of 2020. In Sacramento, we are in the process of rolling out several new communities with our first opening in June this year.

Affordability is a focus that many of our new communities coming out of our long-term California assets like Skyline in Santa Clarita, Altis in Beaumont, both of which feature housing programs that fit within FHA loan limits. Our long-term California assets give us a distinct advantage and location, affordability and margin. These initiatives will go a long way in diversifying our geographic footprint, while continuing to design and develop affordable price points across all product segments. Thanks to the resiliency of the consumer, the strength of our national economy and our ability to adapt to changing market conditions, I am much more optimistic about the near-term trajectory of the housing market, than I was at the beginning of the year.

More importantly, I am as confident as ever in the long-term outlook of TRI Pointe Group, thanks to our strategic focus, strong balance sheet, and proven leadership team. With that, I will now turn it over to Mike for more detail on the numbers.

Mike Grubbs -- Chief Financial Officer

Thanks, Doug. Good morning, and welcome everyone to today's call. I'm going to highlight some of our results and key financial metrics for the first quarter, and then finish my remarks with an update on our expectations and outlook for the second quarter and full-year 2019. At times, I'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 first quarter. Home sales revenue was $493 million on 814 homes delivered, at an average sales price of $605,000. Our homebuilding gross margin percentage for the quarter was 14.4%, and SG&A expense as a percentage of home sales revenue was 15.7%. Recorded $6 million in other income and ended at roughly breakeven for the quarter, reporting $71,000 of net income.

Net new home orders were down 12% on a 14% increase in average selling communities on a year-over-year basis. Our overall absorption rate was three homes per community per month for the quarter, which was ahead of our projected 2.6 we discussed on our last call, but down compared to 3.8 in the first quarter of 2018. We were encouraged that our monthly net orders and absorption rate increased each month during the quarter with March posting an absorption rate of 3.7 homes per community. You can see the historical cadence of orders on Slide 28.

So far through the first three weeks of April, we've continued to see strong demand and -- with a total of 336 orders. As for our active selling communities during the first quarter, we opened 10 new communities; three in California, three in Arizona, two in Washington, one in Maryland and one in Texas. We also closed 10 communities resulting in an ending active selling community count of 146, up 11% in the first-quarter 2018. Our active selling communities at the end of the quarter is shown by state on Slide 7.

We ended the first quarter with 1,842 homes in backlog at an average sales price of $672,000 for a total dollar value of $1.2 billion. During the first quarter, we converted 61% of our fourth-quarter ending backlog delivering 814 homes, which was a 12% decrease compared to the same quarter last year. Our average sales price of homes delivered was $605,000, down 4% from last year. This resulted in home sales revenue for the quarter of $493 million, a decrease of 15% from the same quarter last year.

Our homebuilding gross margin percentage for the first quarter was 14.4%, compared to 22.7% in the same period last year. With a lot of abandonment charges Doug mentioned earlier, our homebuilding gross margin would have been 15.5% for the quarter compared to our guidance of approximately 16%. Moving forward, we anticipate our homebuilding gross margin to be approximately 17% for the second quarter and then revert to a much stronger margins in the back half of the year as we deliver a higher percentage of our revenues from California, and more specifically our long-term California assets. To put more color, as of March 31, 2019, there are 1,842 units in backlog.

We have a homebuilding gross margin of over 23%. Based on this expected trend and strength of our future margins, we reiterate our full-year homebuilding gross margin guidance of 19% to 20%. Through the first-quarter SG&A expense as a percentage of home sales revenue was 15.7%, compared to 12.9% for the same period 2018. The year-over-year increase in our SG&A percentage was largely due to lower operating leverage on the fixed components of SG&A, resulting from the decrease in home sales revenue and higher overhead costs, as a result of our expansion efforts into the Carolinas, Sacramento, Austin and the Dallas-Fort Worth market.

As I mentioned earlier, we recorded approximately $6 million of other income during the quarter related to reducing a liability with warehouses, associated with a tax sharing agreement, which was amended in March resolving certain matters related to the WRECO transaction. At quarter-end, we owned or controlled approximately 26,700 lots, which represents a 5.4-year supply, based on our last 12 months of deliveries as of March 31. The detailed breakdown of our lots owned will be reflected in our quarterly report on Form 10-Q, which we filed this week. 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. Some of you may have read our 8-K filing from earlier this month, regarding extending the maturity of our existing $600 million unsecured revolving credit facility, and adding a new $250 million term loan, both of which mature in March 2003. We will draw on the term loan to satisfy a portion of the $382 million in senior notes, currently outstanding which mature in June this year. The balance of the senior notes will be paid off with cash on hand or proceeds from our revolving credit facility.

At quarter-end, we had approximately $3.2 billion of real estate inventory. Our total outstanding debt was $1.4 billion, resulting in a ratio of debt-to-capital of 40.7% and net debt-to-net capital of 38.1%. We ended the quarter with $968 million of liquidity, consisting of $149 million of cash on hand and $890 million available under our unsecured revolving credit facility and term loan facility. With respect to our stock repurchase program, we did not purchase any shares during the quarter, as we focused our cash flows toward the maturity of our senior notes, which I just mentioned.

Now I'd like to summarize our outlook for the second quarter and full-year 2019. The second-quarter 2019, the company expects to open 10 new communities, and closed out 13 communities, resulting in a 143 active selling communities as of June 30, 2019. In addition, the company anticipates delivering 53% to 58% of its 1,842 homes in backlog as of March 31, 2019, at an average sales price of $610,000. The company expects its homebuilding gross margin percentage to be approximately 17% for the second quarter, and its SG&A expense as a percentage of home sales revenue will be in the range of 12.5% to 13.5%.

Lastly, the company expects effective tax rate will be in the range of 25% to 26%. For the full-year the company reiterates its previous guidance to delivering between 4,600 and 5,000 homes at an average sales price of $610,000 to $620,000. In addition, the company expects homebuilding gross margin percentage to be in the range of 19% to 20% for the full year and we expect full-year SG&A expense as a percentage of home sales revenue will be in the range of 11% to 12%. And then finally, the company expects its effective tax rate for the full year to be in the range of 25% to 26%.

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

Doug Bauer -- Chief Executive Officer

Thanks, Mike. In summary, we feel very good about the direction of our company in the homebuilding industry, as we head into the second half of the spring selling season. The combination of steady job creation, accelerating wage growth, and muted inflation provides an ideal backdrop for our industry, as it is buffeted by supply, labor and regulatory constraints. Order activity picked up nicely as the quarter progressed, and we've seen good demand trends going into April.

We continue to pursue our long-term strategic initiatives through a combination of market share gains within our existing operations, and expansion into new markets, all while focused on achieving operational excellence in every facet of our business, maintaining a strong balance sheet and generating positive cash flow. We believe that by adhering to these principles, we can double the size of our business over the next decade and creating significant value for our shareholders. Finally, I would like to thank all of our team members for their efforts this quarter. There were several obstacles facing our industry as we headed into the new year, but you continue to overcome these obstacles with passion and energy that continues to change the lives of our home buyers every day.

I'm very appreciative of all your efforts. And that concludes our prepared remarks, and now we'll be happy to take your questions. Thank you.

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Stephen East with Wells Fargo. Please proceed with your question.

Paul Przybylski -- Wells Fargo Securities -- Analyst

Thanks. Actually this is Paul Przybylski on for Stephen. First, I was wondering if you could give us some color on the monthly progression of incentives in the quarter and say, overall for the company and then for California as well?

Doug Bauer -- Chief Executive Officer

Hi, Paul. It's Doug. Overall, as far as in our backlog, it's running around 3.5 to 3.6 for the first three months. So very very consistent.

Paul Przybylski -- Wells Fargo Securities -- Analyst

OK. And then is there any -- can you give us a rank order or some type of magnitude for your long-term California [Inaudible] assets versus the company average by project?

Mike Grubbs -- Chief Financial Officer

Yes, we haven't been doing that by project, Paul. As we mentioned, we talked about an average, the margins are north of 30%, 35% for the long-term California assets. I mean, some of those were just getting our basis back for instance, and somewhere well outside of the 35%. So, overall what we think we will deliver this year is about 35% on the long-term California assets.

Paul Przybylski -- Wells Fargo Securities -- Analyst

OK. Great. And then can you give us a little bit of color on what dollar amounts [Inaudible] color on, I guess, you retraded some land deals it sounds like?

Doug Bauer -- Chief Executive Officer

Yes. That's the primary charge and a lot abandonment was up in the Northwest. As you know, Seattle had suffered a lot of price erosion last year. So we took a look at all our deals in escrow and that was -- that was the result of some of the action our land group took.

Paul Przybylski -- Wells Fargo Securities -- Analyst

Great. Thank you. I appreciate it.

Doug Bauer -- Chief Executive Officer

Yeah.

Operator

Our next question is from Alan Ratner with Zelman & Associates. Please proceed with your question.

Alan Ratner -- Zelman and Associates -- Analyst

Hey, guys, good morning. Thanks for taking my questions. So Doug, you sound certainly more optimistic about the market today than a few months ago, and I think we've heard that from others as well. Just curious, when you look across your footprint, have you noticed a stronger snap-back in any particular price point or geographies and are there any parts of your business that have not participated in that trend, or is it, is it pretty widespread across the business?

Doug Bauer -- Chief Executive Officer

I think, as I mentioned in the earnings call, you know the Orange County, $1 million plus in the Bay Area Tom I'd say, it's really still. It's come back from the fourth quarter, but it's still -- it's still a challenge. I characterize the overall market down though it's a crime. There is no way up.

I will say that the death of the move-up first time second time move-up buyer is greatly overblown because we continue to sell houses with our six premium lifestyle brands. As far as some of the other markets, I'm very bullish on Phoenix. San Diego has come back very strong again. But it's a testament for the operating teams and the execution of the product, our focus on design and innovation down there, and those homes are priced a $1.5 million to $3 million.

Tom, you want add some color?

Tom Mitchell -- Chief Operating Officer and President

Basically, Alan, Northern California has been sluggish, it's off about 50% from prior year, but it has accelerated as Doug said, from Q4 without a doubt. Certainly, the core Bay Area, we're seeing more of an impact as we get out into more affordable segments we're seeing better acceleration, but it's still off.

Alan Ratner -- Zelman and Associates -- Analyst

On [Inaudible] exit --

Doug Bauer -- Chief Executive Officer

Focusing in on -- one other comment there Alan, Trendmakers absorption, you can see in the slide deck is actually a good improvement quarter over quarter. We're seeing good absorption in our new Dallas division through the first quarter. Houston keeps plugging along and Austin had a really good quarter or two. So overall, Texas is doing fine.

Mike Grubbs -- Chief Financial Officer

And Alan, just -- this is Mike. I'll give you some more data. On our absorption rates, the entry level we absorbed at 4.1 for the quarter, the move-up was to 2.8, luxury was 2.6, and the active adult was 1.7, just to give you some more color.

Alan Ratner -- Zelman and Associates -- Analyst

That's helpful, Mike. And I do have a second question, but maybe after, if you have the year-over-year changes on those, that would be helpful as well, but --

Mike Grubbs -- Chief Financial Officer

I do you know.

Alan Ratner -- Zelman and Associates -- Analyst

OK. You want to just go quickly on that?

Mike Grubbs -- Chief Financial Officer

Sure, yeah. It was 5.4 on entry, 3.5 move-up, 3.3 luxury, and 3.5 active adult in the first quarter.

Alan Ratner -- Zelman and Associates -- Analyst

OK. Great and thanks. And then, Doug, you guys have entered or are in the process of entering a number of new markets, some you're doing organically, some you've done through M&A. Just curious, as you're kind of going through that process, is there any kind of retrospective commentary you can provide as far as which ones might be going along smoother than expected, which ones there's been some bumps in the road, and going forward, is there a preference one over the other between M&A and organic?

Doug Bauer -- Chief Executive Officer

Well, M&A gives you the more immediate result. Whenever you do an M&A transaction, you can always find some bones period in the closet here and there. Organically, you get exactly what you want. So we're going to continue to pursue both.

When you look at our game plan for over this next decade that I talked about doubling our size, really comes in the Southeast portion of the country. I mean there is over a -- roughly as we plan it out over -- a little over $1 billion of revenue that we're not getting. Texas is a big growth area obviously we made the acquisition at Dunhill. As we forecast out over the next 5 to 10 years, that's another $0.5 billion.

Then you look at the Northwest, there some areas that we want to pursue in that area, that's another $400 million, $500 million as we plan it out and the balance comes from our existing operations. So we've got a lot of runway for the company and we like our position as a premium lifestyle brand being opportunistic both entry level move-up, luxury and active adult, is there's less competition, relatively speaking. I mean it's super competitive in the business, but there is less people. Everybody is pivoting into the entry level and we'll let all the folks plan that entry level and they're going to do just fine.

Tom Mitchell -- Chief Operating Officer and President

Hey, Alan, it's Tom. I'll just add relative to our existing new operations, Austin feels like it's gaining momentum now and we're really positive about future results that we expect there. And then we're excited as Doug said in his remarks about our launch in Sacramento. We're opening our first project in June and then we've got a couple more after that.

But those markets feel good and the teams that we have in place there are the right teams. So we're pretty optimistic about this too.

Alan Ratner -- Zelman and Associates -- Analyst

Great. Thanks, guys.

Operator

Our next question is from Stephen Kim with Evercore. Please proceed with your question.

Stephen Kim -- Evercore ISI -- Analyst

Yes, thanks a lot guys. I've had a couple of housekeeping items to begin. I guess, the purchase accounting, can you just remind us exactly what that was in the quarter and whether -- what you're expecting for that in 2Q? I apologize if you've covered that already. I jumped on the call late.

Mike Grubbs -- Chief Financial Officer

No, that's fine. The purchase accounting affected the Dallas margins by about 250 basis points even for the quarter.

Stephen Kim -- Evercore ISI -- Analyst

Right. The Dallas margins or is that 250 basis points?

Mike Grubbs -- Chief Financial Officer

Correct.

Stephen Kim -- Evercore ISI -- Analyst

OK. What was it for the whole company overall?

Mike Grubbs -- Chief Financial Officer

It's roughly 10 basis -- 10 basis points to 15 basis points overall consolidated.

Stephen Kim -- Evercore ISI -- Analyst

Got it. OK. And is there anything expected in the second quarter or beyond?

Mike Grubbs -- Chief Financial Officer

Probably about the same dollar amount, same basis.

Stephen Kim -- Evercore ISI -- Analyst

OK. Will that eventually stay -- I mean pretty much dissipate by 3Q or what do you expect for the back half?

Mike Grubbs -- Chief Financial Officer

Pretty much gone by 3Q, yes.

Stephen Kim -- Evercore ISI -- Analyst

OK. Great. And then I assume in your 2Q margin guide, there's no impairment -- the additional impairment that you've taken thus far in April in that number, right?

Mike Grubbs -- Chief Financial Officer

No, there's none.

Stephen Kim -- Evercore ISI -- Analyst

Yes. Very good. OK, great. And then the -- the commentary about the snap-up in the margins, which -- you've been talking about that.

And so that's -- your comments are consistent, but we weren't expecting the 2Q margin to be as low. We weren't expecting that snap-back to be quite so abrupt. And I guess, I'm wondering if you can talk about what has changed if anything, in your projected margin trajectory going from 2Q to the back half of the year, or is the guidance you provided today, consistent with how you saw things three months ago?

Mike Grubbs -- Chief Financial Officer

Yes, it's very consistent with how we saw things and how we talked about it. We thought at the end of the first quarter -- we talked about in our first couple of quarters margins were going to be relatively flat around that 16% range. So the snap-back is really related to the amount of revenues that we start delivering from California in the third and fourth quarter. If you remember, last year in the third and fourth quarter, we didn't sell that many units and California was relatively weak.

And so, we're -- hence, we're not delivering that many -- that much revenue from California in the first couple of quarters this year. I think in 1Q, our revenue was down $72 million from California alone, that's where our highest margins are. So that's what's dragging down the margins as well as the additional incentives that we gave in some of the other markets in 4Q.

Stephen Kim -- Evercore ISI -- Analyst

Yes. OK. Now that's very helpful to understand how things were consistent over the last few months in your outlook. And then as you carry on into 2020, I know you're not giving guidance on 2020.

But just conceptually it, would it be fair to say that the makeup of your closings in the back half of 2019, it's going to be more similar to what you would generally expect for 2020 relative to or versus the makeup of deliveries geographically in the first half of 2019? Or is it that -- would it be the case that the bringing on of some of these new areas of expansions would make the margins in 2020 maybe a little bit more similar to the front half of 2019 than the back half of 2019?

Mike Grubbs -- Chief Financial Officer

No, I mean, I think overall for the full year, the '19 to '20 is a pretty good run rate for our margins moving forward as we bring on other markets where we're more of a merchant builder and buying at that 18% to 22% margin. But I think our margins will be a little bit more consistent next year assuming that California continues to sell at the pace that we're currently seeing, that's equivalent to the rest of our markets. And the reason we have the spike is because we're just not delivering that many California units in the first half of the year.

Stephen Kim -- Evercore ISI -- Analyst

Right, got it. And then last one for me. In terms of the expansion, you mentioned, Austin and you mentioned Sacramento. You didn't -- I didn't hear you at least mention anything about the Carolinas.

I know Gray has been working to grow the business there. I was curious as to A, when you think that the Carolina initiative will be a more meaningful contributor to orders; and two, would you be -- is it your intention to expand beyond Charlotte and Raleigh into broader in the Southeast from that base or are you going to still be focused on those two metros?

Doug Bauer -- Chief Executive Officer

As I mentioned, Stephen, in the earnings call, we'll open our first communities in the Carolinas, the first half of 2020 and it will show more meaningful order delivery and bottom-line support really late '21 and '22. I mean when you go -- you start something organic, you've got a lot more lead time as I mentioned in the previous call -- previous question versus M&A. We continue to look at M&A. As I mentioned previously, we look at the Southeast as a $1 billion as we put together our plan and our map of expansion.

Now there is $1 billion plus of revenue in the Southeast. So yes, we will definitely continue to expand in the Southeast, not just in Charlotte and Raleigh.

Stephen Kim -- Evercore ISI -- Analyst

Got it. Thanks so much guys. Appreciate it.

Operator

Our next question comes from Jay McCanless with Wedbush. Please proceed with your question.

Jay McCanless -- Wedbush Securities -- Analyst

Hey, good morning. Thanks for taking my questions.

Mike Grubbs -- Chief Financial Officer

Good morning, Jay.

Doug Bauer -- Chief Executive Officer

Hey.

Jay McCanless -- Wedbush Securities -- Analyst

Hey. So the first one I had, the 23% that you guys talked about was the gross margin, the backlog. How comfortable are you with the backlog? Are there any contingency issues there that we need to be worried about?

Mike Grubbs -- Chief Financial Officer

Well, we do have some contingent buyers in the backlog, but I mean, the strength of the backlog percentages are coming because of the strength of the California deliveries right now. I mean, as we -- as we -- I mean, we probably have a couple of thousand more units to sell and close this year. So I would assume that over time that backlog margin is going to start dropping. Hence that's why our overall full-year margin is 19% to 20%, but the strength of the backlog right now is driven by California.

I think probably 30% some odd of our units are in California right now in the backlog.

Tom Mitchell -- Chief Operating Officer and President

Hey, Jay, this is Tom. We've talked about our 12-point sales and marketing initiative and one of those is contingency management, and we've done a great job on really being focused on our contingency management and we feel really good about those contingencies that we have in backlog as we're managing those on a weekly basis. Overall, about 14% of our backlog is contingency and about half of those are honed to sell and half of them are about honed to close, so we are in really good shape there.

Jay McCanless -- Wedbush Securities -- Analyst

The second question I had, and I think you may have answered this earlier. So apology to do it, but your incentives now versus this time last year, where are those running and then also what are you seeing from your competitors? Are they ramping up their incentives, are they bringing them down so Doug can discuss that?

Mike Grubbs -- Chief Financial Officer

Well, I'll give you the history, Jay, and Doug or Tom can jump in on maybe the competitors, but -- so in our deliveries for 1Q, we had -- 5.8% were incentives. Last year it was 3.4% and then when you compare to the fourth quarter, we were at 4.6% incentives in our deliveries for the fourth quarter. So, it jumped up 120 basis points. The reason for that primarily is we were able to, within the quarter, sell and close a lot of our standing inventory units from end of the year.

So they came with higher incentives to get those moved through the system and hence why we probably missed a little bit on margin. Backlog, I think Doug mentioned that already, but in our fourth-quarter backlog, incentives were 3.5% and where we sit today it's around 3.6%. So pretty consistent, but those range anywhere from to 2% to 10% or 11% depending on the markets that we're in.

Tom Mitchell -- Chief Operating Officer and President

In general though, Jay, I would say that sequentially in most of our markets, we are seeing improvements relative to incentives required to motivate buyers.

Jay McCanless -- Wedbush Securities -- Analyst

And then -- sorry, Doug.

Doug Bauer -- Chief Executive Officer

Yes, sorry. Jay. I mean, as I mentioned earlier, it's still a very competitive business out there with the consumer. So we're seeing more, a little more pricing power in markets like San Diego and Phoenix, but a lot of the other markets, it's competitive with the consumer and so we're -- but we're not losing much ground.

It's heading in the right direction.

Jay McCanless -- Wedbush Securities -- Analyst

And then the last thing, Mike, could you give those absorption by buyer type again for this year and last year. I think that might have been on test.

Mike Grubbs -- Chief Financial Officer

Yes. It's -- for this year, 1Q entry level was 4.1, move-up was 2.8, luxury was 2.6 and active adult was 1.7. And then last year in Q1, it was 5.4 for entry, 3.5 for move-up, 3.3 for luxury and 3.5 active adult. But just remember active adult was like 1% to 2% of our delivery, so that -- it's a growing part of our business, but it hasn't been much of an impact in the first quarter.

Doug Bauer -- Chief Executive Officer

Yes, those are the examples set in the first quarter of 2018.

Jay McCanless -- Wedbush Securities -- Analyst

Great. Thanks for taking my question.

Doug Bauer -- Chief Executive Officer

Yep.

Operator

Our next question is from Mike Dahl with RBC Capital Markets. Please proceed with your question.

Mike Dahl -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking my questions. I wanted to circle back to a question from both Steve and Alan earlier just around M&A. And I guess, it seems like some of the movement over the last six months or so in the industry has shaken some assets at least for some of your competitors.

So as you sit here today, can you just give us your insight on kind of how you are viewing near-term M&A opportunities and whether kind of the bid-ask spread has narrowed over the past three months or so?

Doug Bauer -- Chief Executive Officer

Well, I mean we've always become a very attractive candidate for a lot of the small regional builders with our six premium brands and how we really focus in on the best of big and small, and have a strong local presence. So we continue to see activity in the M&A market, but we're staying very disciplined, like we found the right opportunity in Dallas. I generally would say you know the ask is a little bit north of where the buyer would want to be, but I think generally speaking, the small and medium regional sized builders are finding that they are short on the capital to grow in their markets. And so selling themselves or joining up with a company like TRI Pointe becomes very attractive, but we continue to be very disciplined.

We want to do -- look at M&A deals that are accretive in the long term and at the same time, we will look at organic greenfield expansion too, if we can find the right talent. I would say the talent is the No. 1 priority and then the real estate assets are easy to understand after that.

Mike Dahl -- RBC Capital Markets -- Analyst

OK, that's helpful. My second question just around the monthly order cadence. Clearly your tone and the numbers suggest that there has been a nice bit of improvement. And so not to be too nitpicky, but if I look at April, the first three weeks, it seems like running out with the rest of the month would look like it's kind of a coin flip as to whether April's kind of better on par or worse than the trends that you were seeing in March from a year-on-year standpoint.

So do you think that you are seeing the seasonal improvement kind of level off at this point or is that maybe more a reflection of the Easter impact or something else?

Doug Bauer -- Chief Executive Officer

We definitely have the Easter impacting. Also an extra weekend in March. It's -- if you really want to get technical.

Mike Grubbs -- Chief Financial Officer

Most people don't realize that within March, you actually had five weekends inferred. We write a lot of orders on weekends not really on weekdays. So currently sit here three weeks, we're running at what 3, 3, 3, 4 for April,. We'll see how we close out, but I don't think that's a huge indicator of a massive drop off or anything from absorption perspective.

Doug Bauer -- Chief Executive Officer

I would say that generally speaking, the markets are steady. I mean they're [Inaudible] You've got to be on your A game, as we mentioned in the earnings call, focus on our sales and marketing. We're focusing quite intently on cost management and reducing costs in certain areas. We get some reduction versus other, so this is, there's a lot of wood to chop for the rest of the year.

But we're, as I mentioned in the earnings call, optimistic and looking forward to the rest of the season.

Mike Dahl -- RBC Capital Markets -- Analyst

OK. Make sense. Thank you.

Operator

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

Unknown speaker

Hey, good morning, guys. This is actually Soham on for Jack this morning. So just continuing on the sales pace, I guess -- I think last quarter you talked about 2.8 as being your target for the year. So just wanted to see if that's still the expectation? Are you more optimistic today given the outperformance in the year?

Doug Bauer -- Chief Executive Officer

Well, no, I think we'd probably pull forward some orders that we're not really to say that we're much -- expecting much higher than 2.8 right now.

Unknown speaker

OK.

Doug Bauer -- Chief Executive Officer

I think we're happy that we delivered three for the quarter and our projection was 2.6 for the quarter. When we looked at that comp in the previous year, that's 571 number. That was a high bar and we got really close to that. And I think what was helpful, again, we talked about the number of weekends, you have been running probably 110 to 120 orders per weekend and fortunately, we had five of those in March, so we had 556 orders I think so.

I think we -- today we still feel pretty productive with that number.

Unknown speaker

OK. And then Tom, in the press release you talked about sales and marketing strategy being just as important as the decline in rates to drive absorptions. We do see the product differentiation through our checks, but I guess what we've also seen is one of your larger peers being particularly aggressive on incentives across your price points. So I guess, how difficult is it today to compete with buyers somewhat being trained to expect incentives, I guess, when they walk through the door? Are you having to turn those buyers away in order to retain the value of the brand?

Tom Mitchell -- Chief Operating Officer and President

As Doug said, it certainly is a competitive market out there and it's definitely challenging. I think our sales advisors do a great job engaging with each and every one of our customers and finding out what their specific needs are. We are offering incentives and we're packaging those to tailor to each and every individual buyers' need. So it's not that we are turning them away and saying, if you want to buy an incentive, go elsewhere, but we do stress our premium lifestyle brand, the design and innovation that we have in each and every one of our product.

And I think we're being pretty successful as demonstrated by our sales rate.

Doug Bauer -- Chief Executive Officer

Yes, I would add to that. We run around every quarter to do actual reviews. We were recently up in Las Vegas. And to your point, I mean some of the competitors get a little more aggressive in incentives in certain market areas of Las Vegas, but Cliff and his team have done a very, very good job of differentiating ourselves with our premium lifestyle brand by providing designs, floor plans and innovation that the consumer will be attracted to you and pay for it.

Does that mean, they will go in there with no incentive, yes, they will need an incentive, but that differentiation has a big impact on our ability to sell homes. And then what we do is, we do surveys of these buyers and we actually have all that data to support that type of differentiation. So again, we'll hear, we'll feel it, but we still differentiate ourselves with our design innovation, Montrias as we push through all our divisions.

Unknown speaker

Got it. Another -- if I could just sneak one in, Mike. For SG&A, it sounds like, correct me if I'm wrong, it sounds that you had some additional headcount reductions in this quarter, which should be a net benefit, but then you add in Dunhill and the start-up costs. So should we think of SG&A dollars to be something more flat year over year despite the deleveraging on a percentage basis?

Mike Grubbs -- Chief Financial Officer

Yes, it's relatively flat. I think we -- our G&A runs around $38 million to $40 million a quarter roughly.

Unknown speaker

Got it. Thanks.

Operator

Our next question comes from Carl Reichardt with BTIG. Please proceed with your question.

Carl Reichardt -- BTIG -- Analyst

Good morning. Thanks. I wanted to ask one big picture question to you, Doug. When we talk about the 10-year plan to double the size of the company, if you kind of sketch that out, how much of that is just increasing penetration within the markets we already have a decent sized presence versus trying to expand into new markets?

Doug Bauer -- Chief Executive Officer

About $600 million to $800 million of -- let's say roughly you're painting a picture of $3 billion of growth over the next five to 10 years. As I broke it down, it's about a $1 billion in the Southeast, $500 million in Texas, $500 million in the Northwest. We had 3.2, if you want to do the math, it's about $800 million in the balance of the markets. So that's kind of the roadmap that we've -- we've picked.

Mike Grubbs -- Chief Financial Officer

But we planted the seeds in a lot of those markets.

Doug Bauer -- Chief Executive Officer

Yes, we've already -- exactly. I think that's what he's asking, that's part of that $800 million.

Carl Reichardt -- BTIG -- Analyst

Yes, that is. And then just a little picture question on incentives that you guys were kind enough to breakout the four subsets of the product offering. And if you look at either geography or those subsets, were you seeing the incentives come off most strong? What one or two geographies and what one segment would you say your ability to drag incentives down over the course of the quarter has been stronger?

Doug Bauer -- Chief Executive Officer

Yes, I would say that the net pricing improvement for the first quarter and it's just three months Carl. It's about 1% net positive pricing power in the San Diego market and Phoenix. I would say that Seattle, Norcal, rest Inland Empire, Vegas, that's -- the net pricing power is down about 1% which would be offset by some cost improvements. The rest of the markets are flat.

So it's -- as we said earlier, our incentives and backlog at running 2.5 to 3.6. So it's still going to be a grind. There is no -- there is no way up here as we go through the end of the rest of the year, but we're encouraged by the activity that we're seeing in our models as we open 10 new communities. We had very strong activity in Phoenix, out in the Inland Empire, in a new community up in Seattle, Cedar Landing.

So it's across the market you are seeing puts and takes. So it's just a classic housing market right now.

Carl Reichardt -- BTIG -- Analyst

Would you say traffic conversion rates picked up during the quarter, Doug?

Doug Bauer -- Chief Executive Officer

Traffic conversion rate.

Carl Reichardt -- BTIG -- Analyst

Yes.

Chris Martin -- Vice President of Finance and Investor Relations

Yes.

Carl Reichardt -- BTIG -- Analyst

So as percentage of traffic you're turning into an order?

Doug Bauer -- Chief Executive Officer

Yes, yes.

Carl Reichardt -- BTIG -- Analyst

OK. Thanks very much guys.

Doug Bauer -- Chief Executive Officer

Yeah.

Operator

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

Nishu Sood -- Deutsche Bank -- Analyst

Thanks. So the -- the improvement in the order pace in March, obviously a pretty strong improvement there. You mentioned the weekend issue. So obviously gives that a bit of a boost.

Obviously, rates went down and benefit of demand generally. Were there any price or incentive adjustments, which might have boosted March as well? Just kind of thinking, trying to understand the timing of the incentive and price adjustment patterns that might have affected the trends of the quarter, particularly March.

Doug Bauer -- Chief Executive Officer

No, not at all.

Nishu Sood -- Deutsche Bank -- Analyst

Got it, got it. OK. And California specifically, since there's been a lot of focus, you folks have a pretty diverse operation in California. And you mentioned earlier, just the general color that the move-up buyer and you know the California market is not -- it's impacted, a lot of folks have talked about.

How did California specifically trend through the quarter kind of product, segment type, different -- different submarkets? Was the improvement more notable in California, and if so -- or less notable, and if so, were there specific product sites or regions of California where it might have been more notable than not?

Doug Bauer -- Chief Executive Officer

Well, as I mentioned in the earnings script, the Inland Empire, San Diego, all -- LA, all had strong, very good sequential improvement from the end of the year. The Bay Area continues to be a challenging market in Orange County or what I call Orange County over $1 million has been softer, but as you go out to IE, as I mentioned, it's sequentially gotten better every month. I mean when you go down to San Diego and we're selling houses that are a $1.5 million to $3 million, that's a pretty international buyer profile down there. So you can't just paint a brush with California and say, the Asian buyer, the Chinese buyer has left.

I mean we have a very diverse buyer profile year here and the homes in San Diego and that luxury price point are doing very well.

Nishu Sood -- Deutsche Bank -- Analyst

And then, so do I take from that that price point-wise the improvement since the end of the year was more notable in the lower price point regions or product type than it was in higher price point product type?

Mike Grubbs -- Chief Financial Officer

No, I think you see it in our backlog guys. Nishu, our backlog average sales price is actually up. I think we've seen a broad-base across most of the markets and Doug talked about in the opening comments, our order cadence sequentially was 2.0, 3.5, 3.9 from January to March throughout the quarter. We've seen pretty good absorption.

I mean Inland has really picked up as of late. And those price points are obviously lower than San Diego, but San Diego continues to sell very well to the market.

Nishu Sood -- Deutsche Bank -- Analyst

OK. Thank you.

Operator

Our next question comes from Scott Schrier with Citi. Please proceed with your question.

Scott Schrier -- Citi -- Analyst

Hi, good morning. First, quick follow-up on the absorption question. If I look from January through March and understanding that the five weekends, the overall sequential pickup is, it's also -- it's a lot more than what we saw an '18, in '17 and '16. And I know you said that there's not really anything in terms of trends there.

I know that California had some really bad weather, maybe earlier in the quarter. So I'm wondering if weather played any kind of role also in the meaningful pickup in absorption as you went through the quarter?

Tom Mitchell -- Chief Operating Officer and President

Yes. Scott, this is Tom. I would say that weather could have played a part of some of the California improvement sequentially, but we're not chalking it up to a big weather-driven deal. Traffic remained fairly constant throughout the quarter.

As Doug said, we've done a great job on lead generation and lead conversion. So I wouldn't place too much emphasis on the pickup due to improving weather condition.

Scott Schrier -- Citi -- Analyst

Got it. And can you also comment on maybe in the back half of the year, how you're thinking about community count growth?

Mike Grubbs -- Chief Financial Officer

Yes. We've already -- you saw what we did, we opened 10 new communities in the first quarter and we're guiding to 10 in the second quarter. Overall, we'll do about 50 new communities this year.

Scott Schrier -- Citi -- Analyst

OK, great.

Doug Bauer -- Chief Executive Officer

And then [Inaudible]

Scott Schrier -- Citi -- Analyst

OK. Lastly, on capital allocation, could you give any comments on what you're thinking in terms of whether it's operating cash flow and how you're thinking about leverage or some other items like book value accretion from land sales from the longer-dated California assets versus holding and developing them?

Mike Grubbs -- Chief Financial Officer

Yes, we don't have any intention to have any land sales. We've talked about and highlighted the fact that we think we'll be positive cash flow by about $100 million this year. That's our focus. So we want to continue.

On our debt paydowns, we have $382 million of bonds that are due in June, that's why we put the term loan in place and the balance of that we will pay with the operating cash or a drop in the revolver. So our focus right now is debt paydown for that June maturity.

Scott Schrier -- Citi -- Analyst

Great. Thanks.

Operator

Our next question comes from Alex Rygiel with B. Riley. Please proceed with your question.

Alex Rygiel -- B. Riley FBR -- Analyst

Thank you. First question, as it relates to the buyers that are coming back into the marketplace in February, March and April, are any of those buyers that may have walked away 12 months ago? And are you seeing any similarities in their return?

Doug Bauer -- Chief Executive Officer

Not to a huge degree, but we have seen some returning buyers coming back into the market for those that were not able to convert their contingent sales in the third and fourth quarter because of market conditions last year. So we have been successful reengaging with that buyer and there has been people relative to the decline in rates that have spurred some renewed interest in buying activity.

Alex Rygiel -- B. Riley FBR -- Analyst

In the homes completed, unsold of 374 is down from 417 at year-end. How should we think about this? Are you pleased with it?

Mike Grubbs -- Chief Financial Officer

Yes, actually when you look at the numbers compared to 4Q, 4Q I think we had about 1,600 units that were unsold under construction and completed. And now we're sitting here with 1,300 under construction that are unsold and under construction completed, sorry. So we think we've made a lot of progress, we've reduced that number by over 300 units. And like I said, we sold and closed a lot of units that were standing during the period.

Obviously some more units completed during the period as well. That's why the number is only about a 40-unit difference.

Alex Rygiel -- B. Riley FBR -- Analyst

Perfect. Thank you.

Operator

Our next question is from Alvaro Lacayo with G Research. Please proceed with your question.

Alvaro Lacayo -- G. Research -- Analyst

Good morning. Just a question on SG&A. If you can quantify the dollars that you spent on the market expansion as well as deal costs to get an understanding of how inflated those SG&A dollars may have been due to those factors?

Doug Bauer -- Chief Executive Officer

Well, I think we said on the last call that this year incremental G&A across all the expanding market is probably $10 million to $12 million when you add it in total. I mean, that includes expanding Dallas, expanding Austin, Sacramento, the Carolinas.

Alvaro Lacayo -- G. Research -- Analyst

Got it. And then I might have missed it, but --

Doug Bauer -- Chief Executive Officer

[Inaudible] in revenue.

Alvaro Lacayo -- G. Research -- Analyst

Right, of course. On land spend, have you provided any color on what that might look like for the year and if not, what was it for the quarter?

Mike Grubbs -- Chief Financial Officer

We did have the number -- I don't have a number for the quarter off hand in the release, but this year we'll spend about $800 million to $900 million, maybe a $1 billion. Last year, we guided to $1 billion to $1.2 billion. We ended up right about $897 million, I think, so it should be pretty consistent with last year.

Alvaro Lacayo -- G. Research -- Analyst

OK. Great. Thank you.

Operator

Our next question is from Alex Barron with Housing Research Center. Please proceed with your question.

Alex Barron -- Housing Research Center -- Analyst

Yes. Hi, guys. Hey, Doug, so I heard your comments about the entry level. And I guess, other builders are moving in that direction.

So I just kind of wanted to hear your take on the entry level. Are you not in agreement that that's a good place to be, or you just don't see as much opportunity or like what are your general thoughts about it?

Doug Bauer -- Chief Executive Officer

Well, I mean, TRI Pointe is driven by our premium brand proposition. We generate about 30% of our orders and deliveries from entry-level; 45%, 50% first-time second time move-up; 15% or so luxury and the balance is active adult. We continue to believe that a balanced portfolio, a balanced approach is the best opportunity for growth. So pivoting a company into entirely the entry level is a strategy for some.

And we have our strategy and it's clearly differentiating ourselves from our competitors as we continue to look at for land, attract homebuyers. I mean, we look at housing is -- it's not a shelter business, it's really a life-changing business for families and that's going to be continuing our culture and it helps differentiate ourselves in all facets of our business.

Alex Barron -- Housing Research Center -- Analyst

OK. So as we look forward to the next year or two, for example, the community season is rolling out, should we expect a similar mix to what you just said?

Doug Bauer -- Chief Executive Officer

Yes.

Alex Barron -- Housing Research Center -- Analyst

OK. Great. Thanks so much.

Doug Bauer -- Chief Executive Officer

Yep. Well, thanks, everybody. Go ahead.

Operator

That's OK. Ladies and gentlemen, we reached the end of the question-and-answer session. And at this time, I'd like to turn the call back to Doug Bauer for closing comments.

Doug Bauer -- Chief Executive Officer

Well, thanks everybody. It was a good quarter to talk about where the market is going and we look forward to reporting our results in July. Have a great weekend. And thank you very much.

Operator

[Operator signoff]

Duration: 58 minutes

Call Participants:

Chris Martin -- Vice President of Finance and Investor Relations

Doug Bauer -- Chief Executive Officer

Mike Grubbs -- Chief Financial Officer

Paul Przybylski -- Wells Fargo Securities -- Analyst

Alan Ratner -- Zelman and Associates -- Analyst

Tom Mitchell -- Chief Operating Officer and President

Stephen Kim -- Evercore ISI -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

Carl Reichardt -- BTIG -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Scott Schrier -- Citi -- Analyst

Alex Rygiel -- B. Riley FBR -- Analyst

Alvaro Lacayo -- G. Research -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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