The New Home Company Inc.
Q4 2015 Earnings Call Transcript

Published: 27 Feb 2016

[Operator:]

Welcome to the New Home Company Fourth Quarter 2015 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Drew Mackintosh, Investor Relations for New Home Company. Please go ahead, sir.

[Drew Mackintosh:]

Good morning and welcome to the New Home Company's fourth quarter and full-year 2015 earnings conference call. Earlier today, the Company released its financial results for the fourth quarter and the full year. Documents detailing these results are available in the Investor Relations section of the Company's website at www.NWHM.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 are forward-looking statements that involve risks and uncertainties. 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 filings made with the SEC, including its most recent annual report on Form 10-K and in its quarterly report on 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 to the most comparable measures prepared in accordance with GAAP can be accessed through the New Home Company's website and in its filings with the SEC. Hosting the call today is Larry Webb, Chief Executive Officer and John Stephens, the Company's Chief Financial Officer. With that, I will now turn the call over to Larry.

[Larry Webb:]

Thank you, Drew and good morning to everyone who has joined us today as we review our fourth quarter and full-year 2015 results and provide some color on the outlook for our business moving forward. Six and a half years ago, my partners and I founded the New Home Company based upon the notion that we could build and scale a premier, California-based, fee build homebuilder from scratch at the bottom of the biggest housing recession in our lifetime. Given the capital-intensive nature of this business, we knew that we had to be creative with how we deployed our own funds which meant generating fee building arrangements and joint ventures and targeting land deals with phased lock date tight schedules. While the margin upside to these deals were often constrained due to the nature of masterplan communities with profit participation, we understood that this was the best way to use our capital efficiently and bring in revenue to cover our overhead. We knew that focusing on returns rather than gross margin percentages would allow us to scale our business quickly and do so in a profitable manner. Fast-forward to today and you can really understand the growth that has occurred and see the benefits of this strategy. For FY15, the New Home Company reported revenues of $430 million and earnings of $1.28 per share compared to revenues of $150 million and earnings of $0.30 per share last year. Our SG&A as a percent of home sale revenues declined considerably to 10.4%, down from 27.8% in 2014, demonstrating our ability to leverage this platform. We also ended the year with $167 million in wholly owned backlog. Just two years ago, our year-end backlog totaled $12 million. The increase in our top- and bottom-line results for 2015 was a direct result of our strategy to rapidly expand our wholly owned business while continuing to participate in joint venture and fee building opportunities that require limited upfront investment. This strategy produced a return on average equity of 13% for the year, one of the better performances in the industry. While the path to these accomplishments has not always been linear, it has always been part of our Company's DNA focused on opportunities that would scale our business quickly and maximize returns on equity. Thanks to our long-standing reputation in the markets in which we build and the relationships we've forged, the New Home Company has carved out a unique business that allows us to participate in some of the most exclusive communities in the western United States in ways that do not require massive upfront capital investments. Our results in 2015 provided us with the validation that our strategy can succeed on a larger scale and I'm excited about what we can accomplish in the future. With that, here's some color on our operations in the markets in which we build. Our Fiano community along the Newport Coast was once again the standout performer for our Company as we delivered 11 homes during the fourth quarter at an average sales price of $4.5 million. Sales activity was also strong in the community as we sold 13 homes, ending the year with 25 in backlog, representing over $100 million in revenues. We sold the remaining three lots in Fiano in January and this community will be a key contributor to our bottom and top line in 2016. Although Fiano was sold out, we're fortunate to have two equally amazing communities opening this spring, a little closer to the coast in the exclusive Crystal Cove masterplan in Newport Beach. These two communities will offer 55 home sites with panoramic views of the Pacific Ocean and the surrounding canyon landscape and will have base prices ranging from $4 million to $6 million. We expect to have model homes open in the second quarter and deliver first homes by the end of the year. We delivered 21 homes in our two Orchard Hills communities in Irvine in the fourth quarter at an average price of approximately $2.5 million. However, the sales activity of these projects were lighter than we had hoped. Given the rebound in traffic and sales we've seen at the start of the year, we believe the primary reason for fourth quarter slowness was seasonal in nature. We recently added to our presence in Irvine with the grand opening of CRESSA, a new community in the Portola Springs masterplan. This wholly owned community will feature homes ranging from 2400 to 3000 square feet with prices starting from the mid-to high $900,000s. We opened models last week and I'm very happy to report that initial interest in the community has surpassed our expectations. Moving to our wholly owned communities in Northern California, we continue to see good trends at both our projects in the Cannery masterplan in Davis, where we delivered a total of 20 homes at gross margins above the Company average. As a testament to the desirability of this masterplan community, the Cannery recently received accolades from our industry peers at this year's International Building Show, winning masterplan of the Year by the National Association of Homebuilders. We're very proud of our achievement. Closer to the Bay Area, we delivered 19 homes in our Woodbury community in Lafayette at an average price of $1.6 million. Sales activity slowed a bit in the quarter, particularly for our more moderately priced Terrace flats. We attribute this softness in the flats to the absence of models which will be completed in the spring. We expect these models to generate significant interest in the homes. We will also be grand opening another community this spring in nearby Fremont which will feature contemporary townhomes in proximity to great schools, Lake Elizabeth and a fire station. Overall, we remain confident in our market positioning in both Northern and Southern California And look forward to growing our presence in both areas as well as the newly entered Phoenix-Scottsdale area. With that, I will turn the call over to our CFO, John Stephens, to provide additional details for our financial results.

[John Stephens:]

Thank you, Larry and good morning. Overall, we're extremely pleased with our fourth quarter and full-year results. For the fourth quarter of 2015, the Company generated net income of $12.2 million or $0.69 per diluted share, compared to net income of $5.3 million or $0.32 per diluted share in the prior-year period. These increases represented 130% and 116% year-over-year growth in net income and earnings per share respectively. The improvement in our quarterly results was driven by a 342% increase in home sales revenue to $147 million and a 190 basis point improvement in gross margin from home sales and an 860 basis point reduction in our SG&A expenses as a percentage of home sales revenue. The growth in our home sales revenue is driven by a 285% jump in New Home deliveries and a 15% increase in our average selling price to $1.9 million as compared to $1.7 million in the year-earlier period. Our total revenue for the fourth quarter, including fee building revenues, was $195 million, up 167% over the prior-year quarter. Our pre-tax income for the quarter was up 133% to $19.5 million or 10% of total revenue. For the full-year 2015, we generated net income of $21.7 million or $1.28 per diluted share compared to net income of $4.8 million or $0.30 per diluted share in the prior year. Our pre-tax income for the full year was $33.9 million, a 578% increase as compared to $5 million in the prior year. This significant jump in pre-tax income for the full year was driven primarily by a 400% increase in home sales revenue, a 1740 basis point improvement in our SG&A ratio and a $5.3 million increase in joint venture income. The substantial growth in home sales revenue was driven by a 179% increase in delivery and a 79% decrease in our average selling price due to a shift in mix. Our average selling price for the quarter which was up 15% over the prior-year period to $1.9 million, was heavily influenced by the delivery of homes from our Amelia and Trevi communities in Irvine and the initial deliveries from our Fiano luxury product in Newport Coast which averaged over $4 million per closing. These higher-priced communities were partially offset by initial deliveries from our Heirloom and Sage communities and our Cannery masterplan, where our sales prices averaged approximately $550,000 and $1.1 million respectively and to a lesser extent initial deliveries from our more affordable Candela product in Sacramento. Our gross margin percentage from home sales for the quarter was up 190 basis points to 15.1% as compared to 13.2% in the prior-year period. The gross margin per home delivery from the masterplan communities in Irvine and Newport Coast which have significant land seller profit participation were on average in excess of $440,000 per delivery. These strong per-home gross margins provide extremely robust SG&A operating leverage as well as strong returns on equity given the nature of the rolling lot option takedown structures that these masterplans provide. Our SG&A rate as a percentage of home sales revenue for the quarter was down 860 basis points to 7.6% versus 16.2% in the prior-year period. The significant improvement in our SG&A rate was driven by higher home sales revenue which more than offset higher selling and marketing costs with an increase community count and higher G&A to support the growth in our business. Based on our current revenue assumptions for 2016, we expect to see continued improvement in our SG&A rate for the full year. Our net new orders were up 153% to 48 homes compared to 19 homes in the prior-year fourth quarter. The increase was due to a 150% increase in our average active selling communities as our monthly sales absorption rate was flat with the prior-year period at 1.6 sales per average community. As a result of our increased community count and order activity, the dollar value of our wholly owned backlog was up 92% or $80 million over the prior year to $167 million. Average sales price of homes in backlog was $2.5 million, up 18% over the prior year and heavily influenced by the large mix of Fiano homes in our backlog. Our fee building revenues for the quarter which also includes management fees from joint ventures, increased 20% to $48 million while our fee building gross margin was up 210 basis points to 8.5% versus 6.4% a year ago. The increase in fee building gross margin was primarily a result of better leverage due to higher total revenues and volume. The joint venture management fees for the quarter were flat with the prior-year period at $4.1 million. The fee building business continues to be an attractive segment of our operating platform as it provides incremental profits and returns while leveraging our overhead with minimal invested capital. The joint ventures contribute solidly to our bottom line for the quarter, generating $4.6 million in income. Our Meridian joint venture in Newport Beach which recently closed out in January, was the most significant contributor to JV income, with our Orchard Park JV in San Jose as our next largest contributor. The joint venture business is attractive from a return on capital perspective as our pre-tax return on joint venture investment on a trailing 12-month basis was 23% as of the end of the fourth quarter. Our unconsolidated joint ventures generated $135 million in home sales revenues for the quarter and $336 million for the full year. We ended the quarter with eight actively selling joint venture communities which was flat with the prior year. The dollar value of homes in backlog from our unconsolidated joint ventures at the end of 2015 was $118 million. As of December 31, 2015, we owned or controlled over 6000 lots which included approximately 1300 lots in our wholly owned business, 3300 through JVs and 1400 in fee building lots. Our land pipeline consists of lots in well-located in field and masterplan communities in land-constrained markets. We believe our current lot position and relationship with land sellers have positioned us well to support our growing operation. With respect to our balance sheet, we strengthened it during the fourth quarter in two significant ways. First, we raised $47 million in net proceeds from our follow-on equity offering and second, we increased the commitment under our revolving credit facility by $25 million, bringing the total commitment to $200 million. As a result of these transactions and strong closing and revenue activity generated in the fourth quarter, we ended the year with $172 million in liquidity, including $46 million in unrestricted cash and $126 million in availability under loan commitments. We had total indebtedness of $83 million outstanding as of the end of the year which resulted in a net debt to cap ratio of 14.3%. We expect to put much of this liquidity and capital to work in the first half of 2016 by investing in wholly owned communities. Now, I'd like to provide some guidance for 2016. For the full year we anticipate the following. Home sales revenue from wholly owned communities of $450 million to $500 million. Fee building revenue of $100 million to $120 million and income from unconsolidated joint ventures of $10 million to $12 million. Our delivery and revenue activity for 2016 will be heavily back end loaded like it was in 2015. In fact, we're currently estimating that approximately 70% of our full-year home sales revenue will be delivered in the back half of the year with the first quarter being the lightest of the year at less than 10% of the full-year estimated home sales revenue range. We expect our average sales price for the full-year 2016 to decline by roughly 10% to 15% year over year and be down by about 30% sequentially for the first quarter. Both of these declines are due to a shift in mix to lower price communities than what delivered in 2015. With respect to margin, we anticipate our full-year gross margin percentage to decline moderately from the overall level achieved for the full-year 2015 as a result of the community mix and the specific home sites projected to deliver as compared to the prior year. We expect the quarterly cadence of our gross margins to improve ratably over the year, with the first quarter being the low watermark and down meaningfully from the fourth quarter. With respect to community count, we expect to open approximately 10 new wholly owned communities throughout 2016 and close out six which would result in a net 40% increase, continuing the growth of our wholly owned business. Six of these community openings are slated for the first two quarters of the year with the balance weighted heavier toward the fourth quarter. In addition, we plan to open five new JV communities in the second half of the year. I will now turn the call over back to Larry for his concluding remarks.

[Larry Webb:]

Thanks, John. Before I conclude and we go into the Q&A session, I wanted to spend a minute reviewing the land acquisition strategy that we have had since our last earnings call. We have been very busy. During this period we have purchased or entered into new lot purchase contracts totaling roughly $120 million in wholly owned land deals, representing nearly 600 lots and approximately $390 million in future revenues. In addition, we acquired our first property in the Phoenix Metro market with the purchase of a site within the premier Mountain Shadows masterplan in the town of Paradise Valley through a new housing joint venture. In conclusion, I am very pleased with the success we enjoyed in 2015 and feel that we're in a great position to build on that success given the sizable backlog we have to start the year, our current market positioning, our pipeline of new communities and our well-capitalized balance sheet. While we have made great strides since our humble beginnings in 2009, we have not strayed from our core strategy of primarily building one-of-a-kind communities in in field locations and focusing on opportunities that maximize our return on equity. It is a strategy that has served us well since our inception and we believe it will continue to do so in the future. Our 2015 results represent a major turning point for the New Home Company and I'm excited about the future. To those that are interested in learning more about our Company and would like to experience some of our communities and homes firsthand, we will be hosting an investor event on May 24 and 25 in Newport Beach. This will be a great way to get an in-depth look at what makes New Home unique and understand the opportunities that lie ahead for our Company. We have a saying, all builders aren't the same, thankfully. This investor event will allow you to see for yourself our differences. I normally conclude my remarks by saying our future is bright. Today, I would like to clearly state that the present is bright as well. That concludes my prepared remarks and we'd be happy now to take your questions.

[Operator:]

[Operator Instructions]. Our first question today is coming from Alan Ratner from Zelman and Associates. Please proceed with your question.

[Alan Ratner:]

Larry, you sound very optimistic about a lot of your communities and some of the new community openings. And I think there's a lot of concern given that the volatility in the stock market especially at the higher end price points which you guys have a lot of exposure to, that weakness is going to filter through, especially to those more discretionary buyers. If I look at your guidance, it seems like you're assuming a pretty strong spring selling season at least from an absorption standpoint. So, was curious what you're seeing on the ground today that gives you the confidence if you're able to quantify any traffic or sales numbers through the first couple months of the year? Bigger than that I guess is just on the higher end. What is your view on your core buyers set and where their sentiment is today and how exposed they are to volatility in the global markets?

[Larry Webb:]

I've been watching the Republican and Democratic debates for so long I think I should be insulting people right away. Big picture, I have been listening to people say that we're going to have the demise of the move-up buyer for about the last three or four months and we just haven't seen it. One of the things that you should be aware of with our buyers in our projects, especially our coastal projects, is that they are extremely well-capitalized and well-financed. I would say that we have one of the lowest cancellation rates in the industry. I think we were under 10% for much of the year. And what we're seeing is still solid demand for our communities. The other thing on just looking forward front is some of the projects we're going to be opening, for example these two Crystal Cove communities, are just one of a kind projects. They are literally the last 55 lots with ocean and canyon views in the entire Newport Laguna Beach area. So they're irreplaceable and buyers recognize that. But, moving inland even, last weekend we opened what for us is modestly priced move-up housing in a project called Cressa in Irvine, $950,000 to $1.1 million and we had over 2000 people through our models. We're going to begin selling this week, but that's a tremendous initial response. I don't want for one second, Alan, for you or anyone to think that we're just overly optimistic or we measure our buyers, we look at traffic and we just think the quality of the new communities in the pipeline make us feel pretty darn good about what we see in the future.

[Alan Ratner:]

If I could get one more in, with the small cap builders specifically and evaluations where they are, you guys obviously took advantage before the major selling pressure here in the secondary late last year. But, I think your balance sheet is rock solid. Clearly, the leverage is extremely low. I think one of the concerns that we hear from investors is that if the capital markets remain shut to the smaller builders, you guys have a great land portfolio. But what is the cash outflow that's really needed to develop that land and get it to the point where you're able to put up the growth metrics that a lot of people hope and expect? So when you look at your land, especially your wholly owned land where you're developing it today, any way to frame how much cash is needed over the next few years to get that to a point where it's delivering growth? And how do you think about that from a liquidity standpoint? Obviously you have the revolver in place, but any additional plans to raise capital?

[John Stephens:]

I will go ahead and answer first. If Larry wants to fill in some color, he can. In terms of our capital, yes, we're in a great position now as of the end of the year obviously with paying down a lot of the debt with the closings we've had at the end of the year, the equity offering and increasing the size of our revolver was real big for us. Just to give you a sense of, we spent about $124 million on land acquisition on the balance sheet on the wholly owned perspective. And then this coming year, that probably is about 2 times that number for 2016. And a lot of what we're buying, Alan, is obviously on the Irvine Ranch, that's more finished lots and some of the other opportunities that we have in our pipeline are lot option opportunities in other masterplans. So a lot of these lots are further along in the development. So I think that number that I threw out for 2016, obviously there will be some development with that, but a lot of them have finished conditions to them. And there's some other land that we have that is under development that's on our balance sheet today. In terms of the capital requirements, I would say it's reasonable, nothing that's outsized at this point in time. And in terms of going to capital markets, I think doing the equity offering was very important step for us to do these land deals and I will let Larry add any additional comments to that.

[Larry Webb:]

Well, because we're very experienced, I've been doing this over 30 years, the last thing we want to do at this time in the market or any time is be over leveraged or way over our skis. And if anything, I think we've been more conservative and more cautious. Our approach from day one was to tie up great pieces of ground and to, for larger projects, venture those and for smaller projects to wholly owned. As we've grown the Business, the primary purpose for our IPO and then our secondary was we felt we had these great opportunities to grow the Business. And that's what we've taken advantage of. John has done a terrific job as CFO and Wayne Stelmar did before him. And I think we're in a really strong position financially. Even though we're a small cap builder, I think we're in very good position to grow our business the right way.

[Operator:]

Our next question is coming from Mike Dahl from Credit Suisse. Please proceed with your question.

[Mike Dahl:]

John, hoping to dig into the gross margin comments or the guide a little bit and just down modestly for the full year. Just curious if there's any way you can bucket out how much of that is really mix driven in terms of Irvine versus non-Irvine? And if you have, if you could provide maybe some trends or expected trajectory in the wholly owned non-Irvine projects in 2016 versus 2015, that would probably be helpful?

[John Stephens:]

Yes I would say overall, the margins continue to be impacted, as you've noted, by the Irvine masterplan communities. Obviously, they have a price participation component and those will continue to be a heavy influence for 2016 as well. We do expect the cadence of the margins to improve sequentially as we move through the year. I noted that for the first quarter, we expect them to be down a little bit more. Again, that's going to be our lightest quarter of the year. In fact, if you look at our projected guidance, it's less than 10% revenues that we will -- of that range that we will deliver in Q1, just the timing of when that mix comes through. And the first quarter is going to be a little heavier impacted. We're closing out a project in Sacramento that's a pre-IPO project that had pretty fairly low margins. And then as we move through the year again, we expect those margins to pick up with each sequential quarter. For the full-year, our margins could be down somewhere in the neighborhood of 100 basis points. And in terms of Irvine versus non-Irvine, I would say an average if you basketed all of our non-Irvine projects, they're higher obviously than the company-wide average. And the other thing to note is on these Irvine communities which we're opening, Larry mentioned two in Crystal Cove which will be very high end and one in Irvine, is we typically, the margins are usually a little lower coming out of the gate as we open one and develop some momentum and get some volume increases. Hopefully that helps you there, but again, we really like these Irvine masterplan communities because we get the lot takedown structure, very strong returns on equity and capital as you can see demonstrated really by our results. Pretty large gross profit margins. Just to give you an example in the fourth quarter, we did about $440,000 gross margin per home delivery in Q4. Again, a lot of SG&A and leverage that comes out of that.

[Mike Dahl:]

And I guess probably a couple follow-ons there. So if I just think about that cadence and then maybe seeing some improvement through the year, if you think about the things that you've either recently put under control or looking at today, as you look out to what's going to deliver in 2017, does the mix of Irvine versus non-Irvine improve at all? And then the follow-on or the second part is -- completely appreciate the higher gross profit dollars. And then maybe if you could then translate that to that certainly benefits your SG&A leverage as you guys have already started to see. But maybe putting some ranges around how much leverage you'd expect to see in 2015 because maybe it's a little lower gross margin but you will certainly lever it?

[John Stephens:]

I would say in terms of relative to these targets, it could be 150 basis points on the SG&A upwards of 200 if you hit the high end of the guidance. And in terms of the mix and that's for the full year, so and then in terms of the mix, 2017 will still be pretty heavily influenced by Irvine communities from a revenue perspective. Again, higher sales price points, the project in Crystal Cove has a pretty significant impact on a revenues for 2017. I would say from 2016 to 2017, pretty flat in terms of Irvine, a little north of 50%, 55% of our total deliveries revenue.

[Larry Webb:]

I also think that when we're sitting and doing our projections which we have been, there's a couple things that we want to continue to be focused on and be disciplined about. The first is our primary focus is return on our equity. These Irvine deals are incredible opportunities for a homebuilder, any homebuilder. I believe and hopefully you can come out in May and see them, these are one-of-a-kind sites and the idea that the Irvine Company sold them to us is a great honor and responsibility. And so it offers us an opportunity that no other builder in California has. And I think it's a very positive thing for us. So that's one. Second, we're looking at 2017 and we're very optimistic about what is in our pipeline. We raised slightly under $50 million in December. We've already put that money to use. And the majority of those projects we tied up or purchased start hitting the bottom line in 2017, so we're in a really strong position moving forward. And then just one more point that I'd like everyone, I want to reiterate for everyone. We know and I am like the big proponent that this business is not a quarter to quarter business. It is an annual longer term way of running an organization. And I'm 100% just totally passionate about making sure that we never make a short term decision to look good in a very minor way on a call when what we really should be doing is laying the groundwork for longer term financial strength. We based our career on that and I think the results you saw last quarter should illustrate that not only do we know what we're doing, but our strategy is strong and a really good one for us.

[John Stephens:]

Mike, one other thing I just want to tag onto that comment in terms of the Irvine communities, in terms of the deals we're tying up now in terms of what's coming to market in 2017 for us, there are other masterplan communities in very well located locations in Southern California which we will be participating in now that we weren't in the past. Those will also get nice turns and return on our equity there as well. But the margins are probably in the mid-teens. So I wanted to lay that out for 2017 as we get closer to there.

[Mike Dahl:]

I think it's certainly helpful to keep stressing the returns component. Obviously that's the way you structured the Business and the way that should drive value here. You've done a good job and just want to be clear about some of those excitations. So, then final question maybe, just if we think about the fee building side. Seems like the guidance for a bit of a reduction in 2016. So just curious as you look at the pipeline and you're talking to the Irvine guys, should we expect that this is the start of some downshifting on that side of the Business? Or do you think there will be additional opportunities as the year goes on?

[Larry Webb:]

This is Larry again, Mike. That's a great question because I really think if you look at our business model, it isn't like everyone else's. It's fee business we believe in and we also believe our relationship with the Irvine Company is very important and a differentiator for our Company. No, we're just trying to be conservative and pragmatic in how we project. All the indicators we've had was that our fee business will continue to be solid and strong and really over the long run we should be delivering 500 to 750 homes year in and year out in Orange County. We've had very positive feedback from the Irvine Company on our quality and on working with our company and they've been a great partner for us. And all the indicators are that it will be continuing and consistent.

[John Stephens:]

And Mike, also just to add to that point, part of it is just an issue of timing of when Irvine Pacific decides to start the homes and when their villages comes out. It's not necessarily a downstroke in that business, it's just a timing issue and some of that got pulled into the end of the year this year, you can see we exceeded our guidance target for the full year.

[Operator:]

Our next question today is coming from Michael Rehaut from JPMorgan. Please proceed with your question.

[Jason Marcus:]

Jason Marcus in for Mike. First question is on the JV income. You came in a little below what I think you were guiding for, for the quarter and it looks like it was based mostly on lower land sales. Just wanted to get a sense of what the drivers were there and was it related to any softening in the land market or is there any other reasons you could point to? And then as we look into 2016, is any of the JV income coming from the Phoenix market?

[John Stephens:]

No JV income really coming from the Phoenix market this year. But in terms of the mix relative to what we guided to, it really was exactly what you said. It was a land sale delay. And some of that slipped really into this year, so that was the primary component of where the difference was.

[Jason Marcus:]

Okay. Next question is on pricing and incentives in general. As you look across the Business, was hoping you could just go into a little more detail in terms of where you're seeing the most pricing power, how incentives have trended and what you're seeing there?

[Larry Webb:]

Well as we sit here today and this is Larry again, as we sit here today, we're in three very solid California markets, Southern California and primarily coastal and in field sites. We're in the Bay Area and then we're in the Davis and Sacramento markets. As for us, the Bay and Southern California markets where we're located which is again coastal Irvine, Great Park, places like that. We have solid pricing. Sacramento has been softer for us, but we recently opened a masterplan in Davis. And we've seen very solid interest and success and we're seeing from people like John Burns and other economists a lot of projections that Sacramento's market is ready to take off. So, we're not having wild incentives or anything like that and right now we're feeling pretty good about everything.

[Jason Marcus:]

Okay and I guess lastly from a modeling perspective, what was the fully diluted share count entering the first quarter?

[Larry Webb:]

About 20.7 million.

[Operator:]

Our next question today is coming from Will Randow from Citigroup. Please proceed with your question.

[Ken Lee:]

This is Ken Lee stepping in for Will. Congratulations on a great quarter. My first question is around the Phoenix area. I believe last call, you guys said you could update us on the delivery schedule or just what the pacing will look like in Phoenix? Just trying to get an idea of how bright the future will look in Phoenix?

[Larry Webb:]

Well, our first project we think is going to be incredible. It is a one-of-a-kind community, again in Paradise Valley. We've been looking at it for three years, so we just think there's great opportunity but the overall Phoenix market we're quite optimistic about as well and let me explain why. The demographics in the Phoenix marketplace are very, very positive. They have really good job growth. Historically not in boom times but just in solid years Phoenix does 30,000 new housing starts a year in the 2000s. Today there are doing 15,000 and in really boom times they did 60,000. We think that there's great opportunity and upside and a builder like us who primarily focuses on in field and move-up communities, we think we can have a real competitive advantage there. So our first project we feel great about, but we really feel great about everything there. And maybe the most fortunate thing of all is we have this terrific division priced and a very experienced Pat Maroney and he is just a great guy and I can hardly wait to grow there.

[Ken Lee:]

And second question just around the labor that you've seen in the Bay Area, can you provide some additional color? I believe the last call you mentioned you saw delays around 30 days or so. Is there a similar trend you're penciling in for this year?

[Larry Webb:]

Yes, we still see that issue in the Bay Area. It hasn't improved. We're probably putting maybe four to five weeks on additional schedules. I think our costs are 5% up roughly. In Southern California, we're beginning to see a little of it, but it's much less. And I'd say we've added two weeks to our schedules there. The difference between southern and northern California is that with our fee business plus our wholly owned and JV business in Southern California, we really are probably one of the largest builders there. So we have a lot more leverage. We're still newer in the Bay Area, so it's something we're working on. But I think every single homebuilder in the Bay Area is experiencing a similar situation and we just have to put it into our planning and proceed.

[Operator:]

[Operator Instructions]. Our next question is coming from Alex Barron from Housing Research Center. Please proceed with your question.

[Alex Barron:]

I wanted to ask as far as your guidance on the $450 million to $500 million this year, is that based on projects that you already own or does that require you to find some new land deals between now and year end?

[John Stephens:]

No Alex, hi, this is John Stephens. We have everything. Everything is either owned or under lot option takedown program. So everything we have this year is already in tow and basically substantially really all of next year is currently under control as well. We could potentially add something additionally for next year, but 2016 is all taken care of.

[Alex Barron:]

And in terms of the timing of your Phoenix project, when would we expect first deliveries there from what you can tell at this point?

[Larry Webb:]

We're looking at first deliveries mid-2017. We just started our initial marketing program. We're building a project with a connection to a luxury boutique hotel that is on schedule and it's very different for us building in Phoenix versus California. California we expect political issues and delays and in Phoenix, the attitude and atmosphere is very much more positive towards development. And we're on schedule and really excited about it.

[Alex Barron:]

And if I could ask you just on a couple of projects just for a sense of timing, you have a project in Santa Clara. When is that one going to start sales?

[Larry Webb:]

We're going to start sales mid-summer this year on that project.

[Alex Barron:]

Okay. How about the ones in Fremont?

[Larry Webb:]

Fremont we're going to start sales roughly May, June. It might be end of second quarter, early third quarter.

[John Stephens:]

Did you ask about Santa Clara first, Alex? Those will be the third quarter and we do have a project opening as Larry indicated in the second quarter in Fremont called the Landing. And then we will have another Fremont project, attach project that will come really in the fourth quarter. So in the Bay Area, we actually do have some new activity. We have three new attached products that will come online in Q2, Q3 and Q4.

[Larry Webb:]

John, what you don't know is Alex does the most in-depth research of anyone in the business. He goes and sees every one of our communities, so I appreciate that, Alex, a great deal.

[Alex Barron:]

One last one, the one in Folsom, the community village, when is when is that going to start selling?

[Larry Webb:]

That one is going to open up, our goal is to have a giant grand opening in September of this year. And we're on schedule to do that and we will the opening five new communities at that project in a joint venture. It will be the largest and first new community in central Sacramento in as long as I can remember.

[Operator:]

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.