The New Home Company Inc.
Q1 2019 Earnings Call Transcript

Published: 3 May 2019

[Operator:]

Greeting. Welcome to the New Home Company's First Quarter 2019 Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Drew Mackintosh with Investor Relations. Thank you. You may begin.

[Drew Mackintosh:]

Good morning. Welcome to the New Home Company's earnings conference call. Earlier today the company released its financial results for the first quarter of 2019. Documents detailing these results are available in the Investor Relations section of the company's Web site at nwhm.com. Before the call begin, I would like to remind everyone that certain statements made in the course of this call which are not historical facts are forward-looking statements that involve risk and uncertainty. A discussion of such risks and uncertainties and other important factors that could cause actual operating results to differ materially from those in the forward-looking statements are detailed in the company's filing made with the SEC including in its most recent annual report on Form 10-K and in its quarterly reports and Form 10-Q. 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 may be discussed on this conference call. Reconciliations of these non-GAAP financial measures, the most comparable measures prepared in accordance with GAAP can be accessed through the New Home Company's Web site and in its filings with the SEC. Hosting the call today is Larry Webb, Chief Executive Officer; Leonard Miller, President and Chief Operating Officer and John Stephens, Chief Financial Officer. With that, I'll now turn the call over to Larry.

[Larry Webb:]

Thanks, Drew, and good morning to everyone joining us on the call today. I'd like to start by giving some high level commentary about the housing market. Leonard will then give some additional color about current trends in each of our markets. And John will provide more detail on the numbers. In general, Housing market conditions improved in the first quarter of 2019 relative to the fourth quarter of 2018 as buyers became more active following months of weak demand trends. Order activity improved as the quarter progressed which was an encouraging sign as we head into the second half of the spring selling season. At New Home, we made adjustments to our sales and marketing efforts, while acting decisively to streamline our cost structure, re-evaluate land deals and put ourselves in a position to generate cash and reduce leverage in the back half of the year. These actions will continue to be our primary focus during the rest of 2019. While some of the sequential improvement in order activity in the quarter can be attributed to normal seasonality. I believe that there are other factors in place that have contributed to the rebound in demand. First, affordability eased in the quarter thanks to a combination of lower mortgage rates and more attractive pricing from builders. We learned as an industry in the second half of last year that affordability had become more of an issue in several markets and that many buyers were experiencing sticker shock. Through the use of incentives and in some cases face price reductions. The New Home Company and other builders were successful in re-engaging buyers in the first quarter of 2019. While sales demand and absorption rates were lower than the prior year first quarter, absorption rates were up 42% over the fourth quarter, which led to a 62% sequential increase in net new orders. An equally important factor behind the buyer resiliency we saw in the first quarter was the favorable economic conditions that persist in the country. The housing industry continues to benefit from a national economy that is characterized by steady job creation, improving wage growth and muted inflation. Specific to New Home's markets, California continues to be a top state for absolute job creation in the country. While Arizona ranked as one of the best states for year-over-year job creation according to the March 2019 Jobs report. Job growth has always been a key driver for the New Home market and we believe the same holds true today. Another driver of demand is the lack of available supply in most markets. Our industry has been building homes at a rate below the long-term average for over a decade now. And the result has been a combination of tight housing supply and rising prices. The situation is more pronounced in California where the barriers to bringing on more supply is even more challenging due to land entitlement risk and regulatory restructuring. While this is not a new development, the lack of supply has resulted in pent up demand for housing particularly at affordable price points which is why we continue to shift our business in that direction. In summary, demand trends improved on a sequential basis in the first quarter, thanks to some incremental improvements to affordability and the continuation of the same long-term drivers that have propelled our industry since the recovery began. We are optimistic that these demand drivers will remain in place for the foreseeable future as we shift our company's focus to more affordable product. In the meantime, we will continue to focus on cost containment and cash flow generation in order to improve our profitability and our leverage ratios. With that, I'd like to turn it over to Leonard for more color on our market.

[Leonard Miller:]

Thanks Larry and good morning to everyone on the call. As Larry mentioned we saw sequential improvement in demand in the first quarter as buyers responded positively to the combination of lower rates and more aggressive pricing in the market. Order pace for the quarter was lower on a year-over-year basis. The negative spread narrowed as the quarter progressed, incentive levels varied from market-to-market, but in general it stayed relatively flat with what we saw in the fourth quarter of 2018 at approximately 4.5%. We continue to focus on moving down the price points spectrum with the recent opening of three new communities priced below 600,000. The early response to these more affordable projects has been encouraging as absorption rates have been trending above the company average. While the move up market remains challenging, we did experience an up tick in demand as the quarter progressed and did have several communities meet or exceed their sales target in March. Another positive development of note has been the recent improvement in the resale market and an increase in mortgage applications. With respect to geographic color, we saw relatively better trends in Sacramento and Arizona as compared to Southern California, the Inland Empire and the Bay Area. Our two best performing communities from a sales perspective in the quarter where located in the Sacramento area as momentum continues to build in the market and incentives remain in check. Cost pressures helped also abated in the market although we do expect to see labor tighten in the region going forward due to trades in builders having starts delayed due to a historic rainy season. While we still have a small presence in Arizona, the market appears to be strong in a number of price points, though cost pressures remain an issue. We saw the Greater Phoenix market experienced demand at various price points as witnessed by our strong sales at both our higher priced community Belmont and Gilbert and our Mountain Shadows joint venture in Paradise Valley. Overall, we continue to be optimistic about future growth in this market and have eight new communities scheduled to open in 2020. Southern California continues to be a soft market, but we saw a rebound in activity in March with orders only down 4% year-over-year for the month. Trends were better at our more affordably priced communities which is consistent theme across all of our markets. In April, we opened Parson in the bed for master plan in South Corona with base prices starting in the mid hundreds an initial interest in the community has been very strong. Our Seabluff community got a boost from opening the sales models during the quarter and we expect to close over 25 homes in the project in the second quarter. Sales declines were most pronounced in the Core Bay area due to difficult year-over-year comparisons. Higher home prices and an increase in active community count in the market. On a positive note, the overall market did see the spread between prior years comps narrow significantly as the quarter progressed. Builders are staying aggressive with incentives particularly on standing inventory, which has put increased pressure on our sales effort. Similar to Southern California, we saw relatively better sales activity at lower price points, like at our Tidewater Community located in Lathrop where buyers continue to seek alternatives to the high cost of living in the region. Now, I'd like to turn over to John for more detail on the numbers.

[John Stephens:]

Thank you, Leonard and good morning. For the 2019 first quarter, we reported a net loss of $2 million or $0.10 per diluted share compared to a net loss of $640,000 or $0.03 per diluted share in the prior year. The 2019 first quarter included $1.8 million of pre-tax severance charges related to rightsizing our operations and cost structure by reducing our headcount in line with lower demand level. Adjusted net income for the 2019 first quarter after excluding severance charges was $830,000 or $0.04 per diluted share. Home sales revenue for the first quarter was up 25% to approximately $99 million as compared to $79 million in the prior year and was up 10% over the top-end of our guidance. The year-over-year increase was driven primarily by an 18% increase in deliveries and a 6% higher average selling price, which came in at $1 million per delivery. We expect our second quarter home sales revenue to be between $110 million and $130 million, our average selling price to be between $975,000 and $1 million. Our gross margin for the 2019 first quarter was 12.7% as compared to 12.3% in the prior year period. The 40 basis point increase in gross margin was primarily related to a product mix shift which was partially offset by higher interest costs and incentive. Excluding interest and cost to sales, our gross margin from home sales for the 2019 first quarter was up 190 basis points to 17.6% compared to 15.7% in the year ago period. For the 2019 second quarter, we are projecting home sales gross margin including interest of between 12.0% and 12.5%. Our SG&A rate as a percentage of home sales revenue for the first quarter was 16.2% versus 15.9% in the prior year. As previously mentioned, our 2019 first quarter included $1.8 million in severance charges. The 30 basis point increase in SG&A rate was primarily due to the severance charges and higher amortization of capitalized selling and marketing expenses related to higher community count in the 2019 first quarter and to a lesser extent an amortization expense benefit in the 2018 first quarter and connection with adopting the new revenue recognition accounting standard ASC 606 in 2018. These increases were partially offset by better leverage from higher home sales revenue and lower compensation expenses. Excluding the severance charges, our SG&A rate was 14.4% or 150 basis points lower than the prior year. For the 2019 second quarter, we expect our SG&A rate to be in the low to mid 12% range. Our share of joint venture activity for the 2019 first quarter resulted in pre-tax income of $184,000 as compared to $335,000 of income in the prior year period. The JV income for the quarter was largely driven by our Mountain Shadows joint venture in the Phoenix market. For the 2019 second quarter, we are projecting approximately $100,000 of joint venture income. Our fee building revenue for the first quarter was $20 million as compared to $44 million in the year ago period. Our fee building gross margin for the 2019 first quarter was approximately $400,000 or 2.0% versus $1.1 million or 2.5% in the prior year. The lower fee revenue and margin for the quarter was due to less construction activity at our urban communities resulting from lower demand in this sub-market. We are currently anticipating lower fee revenue throughout the balance of the year as compared to the prior year due to reduced demand levels and less construction activity in Irvine. For the second quarter, we are estimating fee building revenue to be between $15 million and $20 million. Net new orders for the 2019 first quarter were down 21% as compared to the prior year, but we're up 62% sequentially from the fourth quarter with March representing the strongest month of the quarter. Our monthly sales absorption rate for the first quarter was 1.7 per community compared to 2.8 per community in the prior year. As a result of slower Q1 absorption rates and higher delivery volumes, our backlog at the end of the first quarter was down 3% year-over-year in terms of units and down 7% on a dollar value basis to $213 million. We ended the 2019 first quarter with 22 active communities which represented a 22% increase over the 2018 first quarter. We expect our second quarter and community count to be 23 remain fairly flat through the balance of the year. We ended the quarter with $42 million in cash, $563 million in real estate inventories and $400 million in debt. We spent $20 million on land during the first quarter and are targeting between $90 million to $100 million in land spend for the full year 2019. We also anticipate land sales of approximately $40 million for 2019, which are scheduled to close by the end of the third quarter. In addition, we repurchased $5 million in principal amount of our [7 and 0.25%] [ph] senior notes due 2022 for an aggregate price of approximately $4.5 million, which resulted in a $417,000 gain after the write-off of related deferred debt cost. During the quarter we also repurchased approximately 154,000 shares of our common stock for an aggregate purchase price of $1 million. We ended the quarter with a net debt to capital ratio of 60.1%, we expect our 2019 second quarter net leverage to be fairly consistent with Q1, and then, begin to decline in the third quarter with the goal of being in the low to mid 50% net leverage range by year end. I'll now turn the call back to Larry for his concluding remarks.

[Larry Webb:]

Thanks John. As previously stated, we responded decisively on a variety of fronts in response to a more difficult market conditions and higher leverage. However, we feel much better about our business today than we did at the end of the fourth quarter. We saw a significant improvement in order activity during the first quarter and especially in the month of March. While sales were lower than the prior year first quarter net new orders were up 62% sequentially over the fourth quarter. In addition, we made progress on our diversification strategy and grew home sales revenue by 25% deliveries by 18% and home sales gross margins by 40 basis points over the prior first quarter. We continue to reposition our portfolio to include more affordable product where we believe sales to manage deeper and sales pace is more robust. We also remain focused on lowering our cost structure, strengthening our balance sheet and thoughtfully allocating resources to best position the company for long-term success. We acknowledge the challenges that currently face our business and believe our company has the right team in place to generate long-term value for our shareholders. Finally, I'd like to thank all of our team members for their contributions in making the new home company the most recognized homebuilder at the 2019 Homebuyers Choice Awards where we won a total of 13 awards more than any other nominated company. We pride ourselves on delivering best in class customer service and these awards were a welcome validation of that focus despite varying market conditions. I'm very proud that we have remained true to our core values regarding both team members and customers. That concludes our prepared remarks and now we'll be happy to take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question is from Alan Ratner with Zelman and Associates. Please proceed.

[Alan Ratner:]

Hey guys. Good morning. Nice job on the progress. Good to hear that the market improvement through the quarter. Larry, first-off, I guess I was wondering if you might be willing to comment on whether that momentum continued into April. And then, secondly, what was going on in the pricing environment as the order activity began to improve through the quarter. Did you find any success maybe pulling back on some of those incentives or was it more the opposite where you became more aggressive in order to move some of those homes.

[Larry Webb:]

Sure. I'm happy to comment on that Alan. As we mentioned, January and February were a little slower than we expected. March came up and was solid and really April was consistent with our plan and was really on a parallel remark. So, we feel good about that and are hopeful that moving forward we're going to continue to see solid and consistent sales. We've seen -- our incentives have basically remained pretty in line with what we had for the fourth quarter. We really maybe are slightly below what we offered in fourth quarter and only in selected markets in some of the newer programs we've opened have we seen some price appreciation primarily in Sacramento.

[Alan Ratner:]

Got it. That's helpful. Second, John, I appreciate the commentary on the leverage targets and I think certainly that that in my opinion would relieve a lot of the concern in the equity valuation if you are able to achieve those targets. Yes, I guess just bigger picture as you think about the next couple of years, I think your revolver matures at the end of 20, so clearly it seems like this year the focus is on paying off the borrowings there. Do you think that when you look at your overall business and the priorities and generating cash and obviously monetizing the assets you already have, should we think about maybe that the next year or two as being fairly steady from the volume and community count standpoint as opposed to any meaningful growth as you really look to monetize or do you think that you can really achieve both given the balance sheet today.

[John Stephens:]

Well, I think you hit it on the head. First and foremost, we're really focused on bringing down the leverage and that would be in the form of paying down the bank line as well as, if there is -- if it makes sense for generating enough operating cash flow to potentially reduce some of the senior notes as well. We'd like to bring our debt to cap down and sort of operate I would say around that 50% range going forward. Now in terms of community accounts as we move forward, I would think it would increase because we're going down price point and that's sort of what we're anticipating. But, I think in terms of revenue growth, I think you're right in terms of bringing down leverage the growth will not be as strong because we are bringing down the leverage.

[Larry Webb:]

If I could just add one point and I want everyone to know this is the optimist in the company speaking. We have in our pipeline a series of new communities that will be hitting in 2020 that I feel very good about. The majority of those are in the Phoenix marketplace and are in price points that are in the $300,000 to $500,000 price range. So we can grow the business with what we have in place, but where we are focused primarily is on bringing cash back in and on lowering our leverage that is our primary focus for the next six to eight to 12 months, but we can we can grow. And another area where we can have improvement and we should over the next 12 months is with a focus on everything we can do on making our, getting our margins up. That's an area that we can show improvement, but it's in blocking and tackling in little and small ways. And it's something that our company is very focused on.

[Leonard Miller:]

Alan, just to follow-up, I would say it would anticipate probably more flat for 20 and then up from there.

[Alan Ratner:]

Got it. That's really helpful. And Larry I'm glad you brought up the margin because if I could sneak in one last one, it's probably on the top of some people's minds another builder last night took a very large impairment in California on assets that they've had on the books for -- well over a decade. And you guys being almost predominantly California. Clearly, you don't have land that's been on there for that long, but the margins are also a bit thinner. Can you just give us an update on where you are on the impairment test? I know you took a charge in the fourth quarter, but is there anything that that's close to being triggered just given the competitive market today?

[John Stephens:]

Now, I would say things have stabilized since the fourth quarter again with sales activity and we haven't really given as Larry indicated, we haven't given away much more on the incentive front than we were sort of at the end of the year. So, we've analyzed all of our projects, in some cases included additional sort of incentives in our budgets, but nothing has changed materially from what we talked about in the fourth quarter on that front.

[Alan Ratner:]

Okay. Thanks guys. Good luck.

[Larry Webb:]

Thank you.

[John Stephens:]

You're welcome.

[Operator:]

Our next question is from Sam McGovern with Credit Suisse. Please proceed.

[Sam McGovern:]

Hey, guys. Thanks for taking my question. Just a further on some of Alan's points. I think you mentioned in response to his questions you may be out there to reduce some of the senior note balance to the extent that you're looking at buying back bonds. How do you think about repurchasing bonds versus equity, I know you did both in the quarter. How do you think about the relative value of one versus the other on a go forward basis?

[John Stephens:]

As well as we indicated Sam, our first priority is to bring our debt leverage down in the near term. Having said that we still have some authorization from the board on the stock buyback, but again number one priority is debt reduction at this point in time.

[Sam McGovern:]

Okay. Got it. And then with regard to Alan's question about the revolver maturity, you mentioned that in the near-term you plan to pay it off. Do you have any plans to extend the maturity there? What are the opportunities? What are your thoughts in terms of the revolver?

[John Stephens:]

Yes. We got a great dialogue with our bank group. We have a great bank group. And we're going to be meeting with them again in the next couple of months just to give an update on our business plan. And then, talk about extension, our current maturity on the revolver now is, I think it's September 1 of 2020, and that would be something we'll be discussing over the next several months with the bank group. But, it is our intention to extend the facility and it is also our intention to bring in our leverage in first and foremost working on paying down the revolver as we move through the back half of the year.

[Sam McGovern:]

Okay. Got it. Can you remind us in terms of covenants, where do you stand currently? What are your options to manage it on a go forward basis?

[John Stephens:]

Well, we are fairly consistent with where we were at the end of the fourth quarter. The leverage covenant under the revolver is the tightest, but we've got room there. And again, we're focused on managing our leverage every day, everything we're doing here whether it's buying land, selling specs not starting as many specs, but that's really the covenant that we're managing closest. And again, our plan is to get that net-net leverage down starting in Q3 I think we will probably be fairly flat in -- from Q1 to Q2, if we have some success in selling some additional specs that we have in the ground there are potentially there's some opportunity to do a little better, but we're not planning on that right now as we sit here today from a forecasting perspective.

[Larry Webb:]

Sam, let us be really clear about this. We value our relationship with our banks and our bondholders as well as our shareholders. And we had a slow fourth quarter, but we acted decisively and we are totally focused on staying within all of our covenants. We will do that and we will show progress over this year and pay down the bank line and move forward in a responsible manner.

[Sam McGovern:]

Great. Thanks so much. That's very helpful. I'll pass it along.

[Operator:]

Our next question is from Scott Schrier with Citi. Please proceed.

[Scott Schrier:]

Hi. Good morning. Larry, you made some comments about your goals of improving your gross margins. I'm curious, if you could talk a little bit more about that given your gross margins and backlog with maybe some of the longer cycle type of homes that have some incentives on them. How do you view that the shift to higher gross margins and whether it's the timing or magnitude of that? And do you have any internal goals that you might have set for, call it the medium term of where you'd like to see gross margins? Where do you like to see ROE had that you think is achievable?

[Larry Webb:]

Well, I think to be very clear, over the next three to four months, our margins are going to be roughly in the same area they have, they could even go down slightly, but because of where our backlog is and where these houses are being delivered. But, over the course of the year, you will see margin improvement. And really when we look at our newer communities that we've opened, we are clearly showing higher margins than what we had on our slower selling older communities. So, we recognize that we must have margin improvement. One of the reasons for our lower margins had been a propensity within our company to have be building master plans where there was proper participation. As we grow, we're going to have fewer of those communities. But I can say of our newer communities that we've just opened, they all are showing higher margins.

[John Stephens:]

And I would just add to that. Some of the higher price point communities with the exception of maybe one or two that's where we're seeing more pressure on the margins. So again, as we pivot to more affordable product and like Larry said, we have been seeing better margins on the lower priced more affordable projects than we have at the higher end as a general rule of thumb.

[Scott Schrier:]

Got it. So to be clear, if we're thinking about maybe into 2020 as you open up a lot of these I think you said eight new communities in Arizona. These might be in the $300,000 to $500,000 price range. They're going to be faster turn with higher margins and somewhat lower overhead given the size of the communities as well.

[John Stephens:]

Yes. I would say that's true. You're still going to have a drag from higher priced communities because obviously they account for a bigger portion of the revenue. But that is as we continue to open these communities and to start pulling these deliveries through that'll help. I think the other thing that will help potentially is, if we can -- if we're successful in lowering our leverage, I think just our debt levels are a little high relative to where our inventory is and equity and I think as we pull -- we're able to pull down our debt and I think absorption is going to be the key. And I know Leonard is very focused on absorption and how we can produce our soft cost and interest granular interfacing.

[Leonard Miller:]

Yes. I think you guys have hit all the right points. I think one thing I would say about Arizona is definitely we should have shorter cycle times, higher margins, one would expect, but you won't get the full year benefit in 2020. So you got to be a little bit careful about that based on the timing of opening. I think the other thing that was -- has been really encouraging for the first four months of the year is when you look at and I know we don't have a huge community count but when you really break it down by product segment, our entry level, we have five entry level communities that averaged nearly four sales per month year-to-date. So that's very encouraging. And then, it just steps down as you would expect gives me based on price point. So and then, the other side of it, we just got increased absorption. We're really pushing on that like John said to bring interest down because we have made progress in margins when you exclude interest, the killer for us is again in high interest as a percentage of cost of sales and then -- your indirect costs and your sales and marketing costs [indiscernible] absorption is slower, so we're trying to find that sweet spot.

[Scott Schrier:]

Great. And then, you've answered several questions on leverage and then spoke to your focus on deleveraging. You also made some comments on the land environment or your land spend? And I know last quarter, I believe you were talking about revaluating, rebidding certain land projects, so I'm wondering if you could speak to the progress and success you might have had in going back to the drawing board on some of those land deals which were not quite as attractive.

[Leonard Miller:]

Yes. It's a really good question. I think it's -- those that are out there, it depends. If the deals were in due diligence what we've really found rather than maybe a little bit relief in price, but really some help in terms more so. And then in one particular case one that we did have tied up in one of our divisions, we did go back to the seller extend the terms and also got a pretty nice price reduction. So it's kind of a mixed bag across the board, but we continue to push at it and have had some success.

[John Stephens:]

I think the other one just to add on that is, we had another community in Southern California where we -- it was a higher price community. We basically went in resounded with the seller and a master plan to bring more affordable product that takes a little longer. But that's pretty much done and we're getting ready to start models here in the next couple of months on that. So that's a real positive feel.

[Larry Webb:]

And Scott, if I could add, we still have 40% of our land that we own or control under option. So this re-evaluation is not a one-time event. We've seen a market strengthening in the last two months, but we continue to look at these properties under option and continue to be very diligent about going back to sellers to make sure that we are successful and can meet our expectations.

[Scott Schrier:]

Great. Thanks for taking my questions and good luck.

[Larry Webb:]

Thank you.

[Operator:]

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

[Alex Barron:]

Your line of credit so far, where has most of that capital...

[Larry Webb:]

Alex I'm sorry, but for some reason we didn't get your question, if you could start it over please?

[Alex Barron:]

Okay. Hi, Larry. What has been the main use for the line of credit so far where has that capital been used?

[John Stephens:]

It's really been working capital land, so our web and our land purchases.

[Alex Barron:]

Got it. And in terms of spec like, I don't know if I heard anything but where are you guys in terms of spec count now versus I don't know say a year ago?

[Leonard Miller:]

Yes. Really quickly I want to just see if I do. But I know that that's the end of last year our spec count I believe is down about 15% overall. We've made a lot of progress on near-term specs where we produced those about 30% in the first quarter. And I would say those that are going to close in the next say four to five months. So the teams working through that. So, we continue to work at it. We're making progress. I think we mentioned this last quarter very, very importantly again managing cash flow over any out leverage. But, we've really put a strict spec policy in place, so we're not -- we're making sure our divisions aren't getting out in front of their sales as we see a better margin on our [indiscernible] sales than we do our spec line. So we're looking at all of that we're making progress, but we still have a lot of work to do.

[Larry Webb:]

Alex as you know, our company as well as anybody. We've never been a large spec builder. And we've primarily had waited until our models were open before we've gone to market or started many specs. As we've gotten into the more affordable prices we've probably added to our spec count a little bit, but so far with our new openings that's proven to be a pretty solid thing to do. But we're -- I would say we're laser focused on specs. And every week we see in our sales whether their future land sales or spec sales and it's something that's very important to the company and we're very disciplined about it.

[John Stephens:]

I think the other area where we have spec on the attached condominium projects, Alex because as I know you have to start a whole building and all the units and you may have pre sold some but generally haven't sold the whole building before you started.

[Leonard Miller:]

That's what I was going to say John too and if you exclude those then the progress we've made quarter recorder is closer in that 23% to 24% range.

[Alex Barron:]

Got it. And then, I heard you mention that you find on growing your media count and in Phoenix. What's the plan over the next year or two in northern and southern California as far as community count?

[Leonard Miller:]

I think -- you want to jump in John?

[John Stephens:]

Yes, I mean I think what we're growing in Phoenix, I would say in Northern and Southern California is probably more flattish. Based on what we have on the board today. Now, we'll continue to evaluate that again based on our success and deleveraging and how much we put back into those markets that will be tied to that.

[Leonard Miller:]

Well I would say in Northern California just really quick, we've opened three new communities this year with the plan to open up an additional three what's going on there is really repositioning by price point. So we're really not doing as much in the Core Bay area those highest price points and really doing more in Sacramento, Taco Bell, Fairfield and some of those commuter markets where we're having -- again higher absorption higher margins.

[Alex Barron:]

Okay, great. Best of luck. Thank you.

[John Stephens:]

Thank you.

[Operator:]

Our next question is from [indiscernible] with Tiffany Asset Management. Please proceed.

[Unidentified Analyst:]

Hey, guys. Can we just talk about, one, the use of proceeds from the land deal you guys you're getting in the third quarter hopefully, is that can be used found the revolver? And second, can we just talk about sales pace and what you guys are expecting kind of in Arizona? That's it. Thanks.

[John Stephens:]

Yes. I'll kind of jump in. This is John on the sales proceeds from any land sales. Yes, that would be first and foremost to be used to pay down the revolver. And then, Leonard, I don't know if you want to talk about sales pace in Arizona?

[Leonard Miller:]

Yes. I don't know, if we're talking currently, we only have really four communities, two in a joint venture and two other communities, what I will say one of our communities there Rich, Belmont and Gilbert, we've average a little less than three a month and that's been consistent since project opening and that's a price point between $800,000 and a $1 million. So we would anticipate that we've got a really good track record there. On that second home type thing it's really been more like one to two a month. And so, but as we look forward, I mean everything is underwritten and the price points are all below $400,000 or $500,000. So we would have underwritten to do 3 a month with kind of the margins that we're targeting. But again, let's give a little bit of time before we get him out of the ground.

[Unidentified Analyst:]

Thanks so much.

[Larry Webb:]

Sure.

[Operator:]

[Operator Instructions] There are no more questions at this time. I'd like to turn the conference back over to management for closing remarks.

[Larry Webb:]

Thank you. If in conclusion, I could just say that we feel as if we are definitely headed in the right direction. We took strong actions at the end of the fourth quarter. We have seen improvement. We believe that improvement is going to continue and we are very confident that we have the right experienced team in place to be successful. And we appreciate all of your support and your comments. Thank you.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.