MDC Holdings Inc (MDC) 2019 Q1 法說會逐字稿

Good afternoon, and welcome to the M.D.C. Holdings 2019 First Quarter Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Derek Kimmerle, Director of SEC Reporting. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen, and welcome to M.D.C. Holdings 2019 First Quarter Earnings Conference Call.

On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer; and Bob Martin, Chief Financial Officer.

(Operator Instructions) Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements.

These and other factors that could impact the company's actual performance are set forth in the company's first quarter 2019 Form 10-Q, which was filed with the SEC earlier today.

It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides.

And now I will turn the call over to Mr. Mizel for his opening remarks.

Good afternoon, and thank you for joining us today as we go over our results for the first quarter of 2019 and provide an update on our business.

MDC reported another strong quarter of profitability to start the year, generating net income of $40.6 million or $0.64 per share.

Home sale revenues grew 7% year-over-year on similar increase in new home deliveries, even though the number of homes in our backlog to start the quarter was down by 7%.

Homebuilding gross margin expanded 70 basis points over the prior year and net new orders increased 3% with a healthy absorption pace of 3.75 homes per community per month.

We believe that these results provide further validation of our shift to a more affordable product and our adherence to a build-to-order business model.

In general, the new home market improved in the first quarter of 2019 following a period of more modest demand to the end of 2018.

Part of this improvement can be attributed to the normal seasonal -- seasonality associated with our business. Another contributing factor was the decline in mortgage rates, which eased affordability concerns in some high-cost markets.

Lower rates combined with lower price points associated with more affordable home collections resulted in a compelling value proposition for many of our buyers. This provided a welcome tailwind for our sales effort complementing the continuing positive impact of other important economic factors such as low unemployment and strong consumer confidence.

Sales activity in the quarter was consistent across our 3 segments, with each posting average absorption rates exceeding 3.5 net orders per community per month.

Our East segment produced the best order results in the term of both absorption pace and year-over-year growth. This was driven by particularly strong results in our Florida markets and healthy demand for our more affordable product in this segment.

Additionally, orders in each of our segments got a boost from an increased average activity count in the quarter. We believe that increased community count should continue to drive growth opportunities for the remainder of the spring, as we ended the quarter with active communities, 15% higher than a year ago.

The order activity we generated in the quarter came without excessive use of incentives, as evidenced by a gross profit margin in our backlog to end the quarter that is only slightly lower than the 18.9% gross margins we realized on closings during the quarter. The consistency of these margins can be attributed to our build-to-order business model, which lessens the need to use incentives when demand softens. It also allows us to capture additional higher margin revenue through options and upgrades at our Home Galleries.

We believe that focusing our invested capital on sold homes rather than on specs is more risk-adverse way of doing business and produces better, more consistent returns over the long run.

In summary, I'm very pleased with the results this quarter. We produced year-over-year growth in revenues, pretax income and orders despite an uncertain demand environment at the beginning of the year. We expanded our homebuilding gross margins and grew community count by 15%. We continue to sell homes at a healthy rate, thanks to our increased focus on more affordable product, our emphasis on design and customization and our commitment to excellent customer service.

With a strong growth profile, a healthy balance sheet and the highest dividend payout in the industry, we believe MDC is well positioned for the future.

Now I'd like to turn the call over to Bob, who will provide more detail on the results from the quarter.

Thanks, Larry. And good afternoon, everyone. Our consolidated pretax income for the first quarter increased by 10% year-over-year to $55.6 million. Homebuilding pretax income for the 2019 first quarter was up only slightly year-over-year to $41.1 million, as an increase in gross profit was mostly offset by highly -- higher selling general and administrative costs.

However, financial services pretax income increased by 44% year-over-year to $14.6 million. The increase was due mostly to a $4.8 million gain on marketable equity securities for the quarter compared to a $1.2 million loss on marketable equity securities for the first quarter of 2018.

Net income for the 2019 first quarter improved by 5% to $40.6 million or $0.64 per diluted share. Our tax rate increased from 23.3% for the 2018 first quarter to 27.1% for the 2019 first quarter. The year-over-year increase was mostly attributable to energy tax credits, which provided a benefit to us last year, but not this year. The 27.1% rate was above the estimated 24% to 26% range we provided during our last earnings cycle, primarily due to additional tax expense on stock options that were exercised during the quarter.

Our home sale revenues for the 2019 first quarter were up 7% year-over-year to $647.3 million, due entirely to a 7% increase in the number of homes delivered.

Our backlog conversion rate was 46%, which was above the expected range for Q1 that we discussed on our previous call and higher than the 40% achieved a year ago. The improvement in backlog conversion was aided by better cycle times, which were achieved in part due to a higher mix of affordable products.

For the first quarter of 2019, 52% of our closings came from product lines we characterized as our more affordable offerings as compared with 35% a year ago.

In our Mountain segment, cycle times also improved as a result of a vendor-related product defect issue in Colorado that negatively impacted cycle times for those homes delivered in the first half of 2018.

On the other hand, cycle times in our West segment were negatively impacted by our Arizona markets due to labor constraints driven by strong new home demand.

Backlog conversion for the quarter was also helped by a significant year-over-year increase in the number of spec homes we sold and closed during the quarter. Looking forward to the second quarter, we are targeting a backlog conversion rate in the 41% to 43% range, compared to the 40% backlog conversion rate we achieved in the second quarter of 2018.

Note that our average selling price of $476,600 for the 2019 first quarter was virtually unchanged from the same quarter a year ago. It should also be noted that the average selling price for closed homes in the 2018 second quarter of almost $496,000 was the highest in our company's history and was impacted by a greater proportion of our closings coming from some of our highest priced communities in Southern California. And so for the 2019 second quarter, we expect a year-over-year decrease in average selling price somewhere in the mid-single digits.

Our gross margin from home sales was up 70 basis points year-over-year to 18.9%. This increase was driven primarily by our West segment. While our Mountain segment experienced a small year-over-year decrease in their gross margin for home sales, they continue to have the absolute level overall.

Both Florida and the Mid-Atlantic experienced increases in gross margin from home sales, but a shift in mix between those 2 areas resulted in a small year-over-year decrease in our East segment.

Our gross margin and backlog to end the quarter remained healthy at a level just slightly below the 2019 first quarter gross margin of 18.9%. However, it should be noted that the gross margin level we actually realize in future periods could be impacted by cost increases, cancellations, price or incentive changes, impairments, reserve adjustments and other factors.

Our total dollar SG&A expense for the 2019 first quarter was up $11 million from the 2018 first quarter. The increase is mostly due to a $6.9 million increase in general and administrative expense to $42.6 million, driven by a higher average headcount and $3 million of additional stock-based compensation expense from performance-based stock option awards that were granted in 2016 and 2017.

We currently expect second quarter general and administrative expense to be similar to the $42.6 million incurred in the first quarter, based on the information we have today. Unexpected charges related to accruals or other items could cause the actual results to differ from this estimate.

Additionally, our marketing expenses increased by $2.7 million over the prior year caused by additional costs incurred to open and staff our 15% year-over-year increase in active subdivision count.

Of the $18.3 million of expense incurred in the first quarter, about $4 million was variable with closings. The remaining $14.3 million should be relatively constant in the second quarter, though it is subject to some variability based on the timing of expenses related to new community openings.

Finally, our commissions expense for the quarter increased by $1.4 million over the prior year, but this was entirely related to the increase we saw in home sale revenues.

The dollar value of our net orders decreased 1% year-over-year to $851.4 million, driven by a 4% decrease in our average selling price that was largely offset by a 3% increase in unit net orders.

The demand for our more affordable product lines remained strong during the first quarter of 2019, accounting for 60% of net new orders compared to 44% a year ago.

This increase was largely attributable to the continued success of our Seasons Collection, which accounted for 36% of our net new orders in the 2019 first quarter.

The increased prominence of our more affordable product lines across most of our markets contributed to the year-over-year decrease in the average price of our net orders. Additionally, we saw a shift in the mix of our net orders to Florida, which is the state in our operations with the lowest average selling price.

Our monthly absorption rate was a healthy 3.75 for the quarter, though was down 11% from the same quarter a year ago. However, this decrease was more than offset by a 15% increase in our average active subdivision count.

We ended the quarter with an estimated sales value for our homes in backlog of $1.65 billion, which was down 12% year-over-year. The decrease was driven by a lower number of homes in backlog as well as a decrease in the average selling price of those homes.

Active subdivision count was at 178 at the end of the 2019 first quarter, up 15% from 155 a year ago. We saw an increased number of active subdivisions across each segment with the West experiencing the largest increase.

Oregon, our newest market, finished the quarter with 2 active communities compared with none a year ago.

Looking at the graph on the right, the number of soon-to-be active communities exceeded the number of soon-to-be inactive for the third consecutive quarter with 10 more communities soon-to-be active versus soon-to-be inactive at March 31. This favorable dynamic gives us confidence that we can continue to drive year-over-year growth in our subdivision count. Based on the progress we have already made, we are on track to have another year of community count growth of 10% or greater.

For the 2019 first quarter, we acquired 1,417 lots for roughly $90 million with an additional $77 million of spend on development costs. Approximately 60% of the lots acquired in the first quarter were finished lots. About 60% were lots intended for our more affordable homes.

2019 first quarter land acquisition spend was notably less than both the 2018 fourth quarter and the 2018 first quarter, as we exercised some caution after seeing slower home sales activity late in 2018. However, we expect to see an increase in activity from the first to the second quarter of 2019 given the solid level of sales activity we saw to start the spring selling season.

Even with a relative lull in acquisition activity, at the end of that quarter, we controlled 22,887 lots, up 7% year-over-year. About 28% of those lots were controlled with an option.

Net homebuilding debt to capital was only 23.3% at the end of the first quarter, flat from a year ago and clearly demonstrating our firm commitment to maintaining a strong balance sheet. Furthermore, our liquidity at the end of the 2019 first quarter was up 27% year-over-year to $1.49 billion, providing us with significant resources to fund continued growth.

And with that, I will now turn the call back to the operator for our question-and-answer session.

(Operator Instructions) The first question will be from John Lovallo with Bank of America.

First one, Bob, I think you mentioned that the G&A component of SG&A was up about 70 bps year-over-year, and stock comp, I believe, was up about $3 million, I think, that's something like 40 bps. And then you mentioned headcount. The first question is does the lease expense get captured in there as well. And I think you mentioned that this portion of SG&A should remain fairly stable in 2Q. Is that correct?

That's right. It was $7 million increase year-over-year. And what you mentioned is correct. With regard to the lease expense, yes, that does continue to go through. To this point, we're finding it's fairly consistent, even with the accounting change that we had this quarter. So that really doesn't provide much of a difference year-over-year versus build accounting. And yes, the $42.6 million of G&A expense incurred in the first quarter, I think, is a reasonable run rate to use in the second quarter as we move forward here based upon what we know now.

Okay. And then, I guess moving on to the Oregon market, took an impairment last quarter on just kind of getting things ramped up there. Just any update on that market? And how you guys are feeling about the operations there?

Yes. After recognizing that impairment, I think we've seen some really good things. We've opened up a few more communities. We have 2 active, but we have others behind that. In fact, when you look at that soon-to-be active versus soon-to-be inactive dynamic, I think we have 2 more soon-to-be active than inactive, so we see that active community count growing in Oregon. So we're starting to get our feet under us in some real operations there. And so we feel positive about what we're doing in that market.

The next question will be from Nishu Sood with Deutsche Bank.

This is actually Tim Daley on for Nishu. So my first question is regarding gross margin, so gross margins came in line with the gross margin backlog at the end of the quarter that you guided to. So just curious as to what kind of -- what was the gross margin profile on the specs that were delivered in the quarter versus the build-to-order closings? And just kind of on a comment that I think you mentioned, Bob, that the build-to-order closings tend to have a bit of a tailwind in margin due to option and upgrade premiums. So just curious as to kind of the differential between the stack margins that were delivered in the quarter and build-to-order, if you could kind of maybe quantify some numbers around that for us.

Yes. I think the differential was about 300 basis points in dirt versus spec, with spec being lower, of course. That was also true in Q4. If you go back to Q3, they were roughly even, the dirt margins versus spec margins. So that is kind of a Q4 and Q1 phenomenon, thus far. And I think we have really seen that and, of course, as a result of the decrease in orders we saw in Q4 and more competition with that spec inventory.

All right, understood. And then I guess, just kind of following onto that second question is the finished specs this quarter are only up 3% year-over-year after being up substantially more on a year-over-year basis than the year last in 2018. So just curious as to -- is there kind of maybe some potential upside to that like gross margin and backlog, given that just from the inventory that you guys have on the ground, there might be, I guess, less closings from spec in next quarter relative to what we saw this quarter?

It's possible. But then again, we don't have those additional specs available for delivery. So there would kind of be an offset on revenue. But you're right. 27% of our orders in Q1 came from specs. And a year ago, that number was more like 20%. So we definitely saw a kind of a bump in our activity due -- in our closings due to those specs that we were able to sell and close during the quarter.

The next question will be from Michael Rehaut with JPMorgan.

First, Bob, I was hoping to circle back to guidance that you gave, I believe, back at your Analyst Day in November. And obviously, with the turbulence that the whole industry had in the second half of the year, I believe on the last call, you kind of backed off that guidance as most builders did. But I was hoping if you could just provide any updated thoughts or comments around to the extent that you want to revisit that guidance. If it's too early or not, I'm not sure. Some builders have provided some full year thoughts, some haven't. But if we recall, that guidance for 2019 was closings growth of 5% to 13%. Gross margins of 19% or higher, SG&A of 11% or lower as -- and ASPs down mid-single-digit. So I know it's kind of a lot of different metrics there, but just any comments around revisiting that guidance directionally would be helpful.

Yes. There's not a whole lot for the full year. I did comment that we think we're pretty well-positioned to head a 10%-plus increase in active subdivision count for the full year just because of what we've seen already in the subdivision growth and what we see in the soon-to-be active versus soon-to-be inactive, so we've got that.

I commented on ASP. We're flat in Q1, but Q2 is likely to be down by that mid-single digits. You're not -- nothing further from there. Obviously, the gross margin with -- still the backlog gross profit margin relatively close to where our closings were, that 18.9%. I think that's encouraging on the margin front. But I think we still want to see what happens for the remainder of the sales season before we do too much more there.

Okay. Fair enough. I understand. I guess secondly, maybe just to drill down a little bit around the gross margins and more around incentives themselves as being a key driver, the guidance, or if not guidance, but the comment around gross margins and backlog being at or slightly less than the first quarter. Obviously, if you guys are doing much more on the build-to-order versus spec, you're not going to be as influenced by shorter-term volatility and incentives related to spec, as Larry, I believe, you pointed out. But at the same time, some other builders have pointed to a little bit of expected improvement sequentially in gross margin, whereas you're looking for a slight decline sequentially. So I was just trying to get a sense if that decline -- expected slight decline to the extent that the backlog gross margin plays out next quarter, that's more driven by mix and -- or if there were indeed a little bit of higher incentives, or if -- I don't know if there was some cost inflation or higher land cost basis. Just trying to get a sense of the different drivers of gross margin going forward, particularly in the second quarter, that might explain a slightly lower number versus, again, other builders that are expecting improvement at least over the next quarter, or if not, for the rest of the year.

Right. And I know some of those other builders have higher spec counts to begin with. So I guess that would be based on the presumption that they are able to decrease the incentives and maintain the volume, which, of course, has yet to play out for the full spring selling season. That said, keep in mind, for our Q1, that comment about 27% of our closings coming from specs versus being closer to 20% in Q4 and 20% a year ago, we had a 16% of our closings in Q1 were both sold and closed during the quarter. So with that higher number of specs and that lower margin, that 300 basis points margin differential, a year ago that was only about 9%. And now we've settled down to a lower number of specs. So I would expect that you don't get quite as much of an influence from specs in Q2. So that could be a positive thing. But that said, I still think we need to take a look and see how demand plays out in Q2 before any of the builders get really excited about it, and the best thing that we have to go off of is what's in our backlog right now.

Just lastly around that and I'll hop off. Some people have focused on lumber as a positive driver to gross margins over the next quarter or 2. Is that a factor that -- to the extent that, that is a factor or a positive factor tailwind in your gross margins and backlog, are there any other offsetting factors such as mix that could be the reason that we're not seeing any type of improvement as it is right now in terms of your backlog gross margin?

Yes. There is -- we certainly have that element too on homes that we've started in 2019. We've gotten a bump from lumber costs being lower. We do have a mix towards Florida and Arizona. Those tend to be a little bit lower in the gross profit margin spectrum as far as we go. So there is a little bit of mix on that front. But that's factored into what our backlog gross profit margin is too, I should add.

The next question will be from Stephen Kim with Evercore.

Yes. First question, I guess, relates to the land spend which you recorded in the quarter. You mentioned that it was depressed, but that you were looking to pick it back up. Wanted to get a sense for if you could give some range around what kind of land spend we should expect. Do you think by the end of the year your land spend relative to, let's say, your revenues would be comparable to what you saw last year? Or is there a dollar value that we might think you might hit by the end of the year, something like that?

Without putting out a specific number, I think you could approach around where it was last year. There's a couple reasons behind that. First of all, we're higher on the development spend right now, and that will continue for much of this year just based upon land acquisition we already did in 2018. The land acquisition piece of it, certainly, that's dependent upon what we see for demand for the remainder of the spring selling season and into the second half of the year. But based upon what we've seen in Q1, we see that going up from where we were in Q1 of 2019. And keep in mind that Q1 of 2019 was probably the lowest level we've seen in about 2 years. So it was a little bit of a pullback for sure, but a little bit of that was a wait and see until we got a taste of the spring selling season.

Got it. So something a little bit north of $1 billion on total land spend wouldn't be out of the realm of what you're thinking, right?

In terms of total land spend, no. That's not outside the realm.

Right. Okay. And then you mentioned that you had sort of deliberately held off on some of your land spend activity due to the -- those softness in the market at the end of last year, which, obviously, makes a lot of sense. I was just curious as to the mechanics around how that decision-making happened. For instance, I was curious as to whether it was the case that land deals, which had past year feasibility analysis, let's say, earlier in the year, that they no longer penciled and that's why you didn't move on them because you lowered your expectations for the future outcomes within that -- on the project that you would build on that land. Or did they actually still pencil and you just decided not to act on those anyway? Basically, which of the two would you say better characterizes the projects you decided not to buy?

There might have been a little bit of both, I think, with reduced absorption rates. Some of them were a little bit bigger than we wanted them to be. We weren't -- wouldn't be able to absorb them as quick as we originally thought, just given what we saw in Q4, if that had persisted, kind of that 20% year-over-year decline in absorption rates that we saw in Q4. So I think there was certainly some of that and then just some straight-up caution as well, just trying to make sure that we knew where the market was before we moved it forward.

Got it. And then as you look across at that competitive landscape with respect to land acquisition, would you say that because of the little scare that we had in the back half of land of last year that you're actually able to find a little bit more wiggle room on the part of land sellers? Or is it -- or has that really not been the case, and you're just able to make the deals pencil because you're able to assume somewhat higher absorption levels than you were in fourth quarter, something more akin to what you had in mind, let's say, mid-year of last year?

I think the land sellers see some of the same things that we've seen, and they're willing to be more flexible on terms especially to make it something that we can continue to move forward with. I wouldn't go so far as to say it's outright decreases in land prices because I don't think we've seen that commensurate decrease in home prices other than a little bit of extra incentivizing in Q4 and Q1 on -- especially on the speculative inventory. So it's more on the terms than anything.

The next question will be from Stephen East with Wells Fargo.

This is Paul Przybylski on for Stephen. I guess first question goes back to margin. Bob, is there any way you could give us the margin profile on say your entry-level communities or more affordable type stuff that you'd opened in the last quarter or so versus some of the more legacy stuff that has been around for maybe a year or more?

It's -- I don't have that exactly like you put it. I will say that the differential between the entry-level has diminished kind of the spread between our traditional product and our affordable product simply because we've rolled it out to more areas. I had mentioned to Michael earlier about the lower margin profile in Phoenix and Florida. And that's where we've gotten a lot of sales, especially in Florida. So naturally, it tends to trend a little bit lower, a little bit closer to the traditional product. And for a long time, I've warned a little bit that even though going back several quarters we've seen as much as a 200 basis point differential between the affordable and other product, that, that had some risk of coming in just because we see a lot of people who are doing the affordable product. Now that said, what we're doing is a little bit unique in that we have build-to-order affordable product, which is something that is not common in our space.

Okay. And then do you have any comments on how April demand has been so far?

I think April demand has been good. I would expect April to be up year-over-year by as much as or more than the 3% we saw for Q1.

Okay. Great. And then do you have any color on California and the various geographies there and their performance? And if it's moving in the right direction?

I think the more expensive, the coastal areas have been tougher. I think that's well documented with a lot of builders. I think the more affordable is still doing well. Northern California for us is still doing well. So really the biggest piece is coastal, higher price points.

The next question comes from Jay McCanless with Wedbush Securities.

The first one I wanted to ask about is, based on the numbers, Bob, you gave earlier about the percentage of affordable homes in your closings and your orders, it looks like orders in the non-affordable stuff were down about 27% and closings were down about 21%. Assuming that I've got my math right, is that a function of just lower demand across the board? Or should we think about a reduction in traditional community count as impacting those numbers?

I mean certainly, most of our land acquisition efforts -- 60% of the lots acquired in Q1, for example, had gone towards that more affordable product. So there definitely is a shift in mix. I don't think necessarily a first-time move-up product we're looking to diminish that significantly. Some of the more expensive stuff, I think, certainly has been diminished, the second time move-up. But the other thing to keep in mind is our affordable product. It spans a lot of different things.

We've talked about urban duplexes, which is a 2-unit building. We've talked about Seasons in Colorado. We built that without a basement. But the Landmark is -- well, that could meet the needs of a first-time buyer or a move-up buyer. So there's a little bit of movement there. But certainly, we're looking to build upon our expertise in the kind of the move-up product. But a lot of our dollars right now are going towards the affordable product lines to make that happen.

And then when we think about the acceleration from February to March in the order comp, I'm assuming that's about a 4.6%, 4.7% for March. And did you see an improvement in demand in both in affordable as well as your more traditional second move-up in luxury? Or is it all focused on the affordable product as you move from February into March?

I don't know if I have it exactly like that. It seemed like it was both our traditional and our affordable.

Okay. And then one other quick question. Just in terms of co-broker fees, could you talk about how much you all have been paying on that? And how it compares to last year's levels?

We've been pretty consistent in that. Of course, we don't pay a co-broke on every deal. But our percentage is pretty high. I think it's about 72%. And that's about the same as it was last year. Typically, it can vary by market, but roughly 3% is a good rule of thumb.

The next question will be from Ivy Zelman with Zelman & Associates.

Actually, this question is for Larry, assuming, Larry, you'll answer it. But we'd like to get your perspective on where -- I think -- was that Bob or Larry laughing? But given that we're late in the economic cycle, where are we in the housing cycle?

Why are you picking on me?

Never, Larry. Never.

I think -- I don't think we're late in the housing cycle. I think that what we've found is a sweet spot that many of the other builders are moving towards, which is affordability. And look, as you see inflation becoming more deflationary as to numbers, you see that affordability becomes even more interesting as we saw the fabulous GDP growth that was announced. So you've got strength, but without inflation, and you have disposable income kind of balancing out. And I think Ivy, that the affordable housing market has good legs and a very fine outlook. The products of higher price points in different parts of the country, much higher than our average sales price, are having more challenges. So I'm very optimistic on where we are and where we're going. And I think other builders are picking it up. The one thing that you continue to hear from us is we restrict our specs to the minimum. They're created really out of fall out of the backlog, and it's proven to be a good strategy. And we allow people to personalize their home. Even in the affordable market, we have a personalization package, and not many other builders are willing to do that. They are going after the high volume spec. You get what we offer, and we're going after the affordable. And we allow you the opportunity to select what you really want.

So I absolutely agree with a lot of what you said. And I think one of the things that we're seeing some of the other builders do, which is Horton just announced that Toll's in the business. Certainly, Lennar is getting into the rental business. Do you see an opportunity in single-family that you can see expanding Seasons in a rental product offering or selling Seasons product to single-family rental operators giving it to those people that have a difficulty affording home and home ownership today?

We think it's a bad business to sell rentals in the markets. In the subdivisions or the areas that we're in, we certainly would not knowingly do it because when you drive down the street and the grass is green, except for a few brown ones, the way people take care of their homes if their rentals are slightly different than if they own it. And I know that there is a demand for homes that are rented out, but we do not intend to knowingly permit it.

The next questioner will be from Alex Barrón with Housing Research Center.

I wanted to see if you could comment on roughly what percentage of your orders and deliveries are coming from Seasons right now versus where were they a year ago, and what's your ultimate target for that?

I think on orders, it was 36% for Seasons. The year-ago number, I want to say it was right around 20%. For closings, it was 26% current quarter and I think 13% a year ago. Hold on one second. I'll get you that comp number on the sales run. Yes. So 19%. I was off by 1%. 19% in Q1 of 2018 for Seasons.

Okay. And where do you see kind of your -- where are you guys targeting that to go? Was it like 50% or more or less than that?

I think we want the affordable offering to be in the 60%-plus range. So I could certainly see the Seasons move in a little bit higher, maybe it's between 40% and 50%.

So is it reasonable to expect the average sales price to keep trending a little bit lower in the next few quarters?

Yes.

The next question comes from Buck Horne with Raymond James.

I wanted to ask a little bit on potential M&A thoughts or activity around that. One of your larger competitors made a move in Las Vegas recently that shore up some market share positions. The Southwest is obviously booming up. So you're having a lot of strength in Florida as well. How do you think about the need or the possibility of some sort of private builder acquisition or other land acquisition to shore up your market share in some of these growth areas?

We've found over all these years we really only acquire assets, not entities -- operating entities because of the contingent liabilities and the legacy problems. And we find that we're able to execute our plan and have the growth we do through natural growth and increasing market share in our existing markets. We have gone into a few new markets over the last 2 or 3 years. And it seems to be working out well. But we don't see M&A as the -- in the sense that it's used today as something that we're pursuing.

Great. That's helpful. And one last one, just if you have it handy. The -- if you have the percentage of the incentives or sales concessions that was used as a, call it, a percentage of ASP, if you have it. And just how did that trend throughout the quarter, if you can characterize that?

Are you talking about closings?

Probably looking either closings or orders or both. Just trying to get a flavor for how you were -- how the level of discounting trend did throughout the quarter.

Yes. I think on orders -- or I'm sorry, on closings, we're at about 5.1%. So that's up about 120 basis points year-over-year and 70 basis points sequentially.

(Operator Instructions) The next question is a follow-up from Michael Rehaut with JPMorgan.

Just wanted to make sure I heard it right around your comments, Bob, on April orders. I believe you said that you would expect them to be up as much or more than 3Q's 3%. Is that right?

Correct.

And so if I'm to extrapolate that, particularly from a community count standpoint, still should be probably up around that roughly 10%. If you kind of work off of your current number and hold pace on the 10% expected or better growth by the end of the year, it would still point to some year-over-year -- decent year-over-year decline, 5%, 10%, let's say, on sales pace. Historically, your sales pace sequentially is roughly flat from 2Q to 1Q. You had the exception last year, but it's -- typically it's been a little bit flat. So just want to make sure if I'm thinking about that right from a sales pace perspective that you're still perhaps not fully back to normalized trends? Or if there's anything else going on there?

That was a lot of math and a lot of extrapolating. I'm not sure I would extrapolate it out to the full quarter at this point. I think it's positive that we continue to have a year-over-year improvement in orders. And obviously, the day is not done. For today, I'm still in April. So we don't have the final count there yet. So I don't want you to read too much into that number right now. I just wanted to give you directionally just a little bit of flavor that things are still going pretty good.

Okay. No, I appreciate that. And then you also said incentives were -- again, just making sure I heard it right, 5.1% of closings, up 120 bps year-over-year and 70 bps sequentially?

Yes. 5.1% of gross revenue for closings. Yes.

Of gross revenue...

Comparisons are correct.

5.1% of closings revenue? Is that okay -- right.

Gross revenue in Q4, the incentives -- those incentives are a reduction to revenue.

Ladies and gentlemen, this concludes the question-and-answer session. I would like to turn the conference back over to Bob Martin for any closing remarks.

Thank you very much for joining us this afternoon on the call. And we look forward to speaking with you again following the conclusion of our second quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.