Taylor Morrison Home Corp (TMHC) 2018 Q4 法說會逐字稿

Good morning, and welcome to Taylor Morrison's Fourth Quarter 2018 Earnings Conference Call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to introduce Mr. Jason Lenderman, Vice President, Investor Relations and Treasury.

Thank you, and welcome, everyone, to Taylor Morrison's Fourth Quarter 2018 Earnings Conference Call.

With me today are Sheryl Palmer, Chairman and Chief Executive Officer; and Dave Cone, Executive Vice President and Chief Financial Officer.

Sheryl will begin the call with an overview of our business performance and our strategic priorities.

Dave will take you through a financial review of our results along with our guidance.

Then Sheryl will conclude with the outlook for the business, after which we'll be happy to take your questions.

Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session, includes forward-looking statements that are subject to the safe harbor statement for forward-looking information that you'll find in today's news release.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission.

And we do not undertake any obligation to update our forward-looking statements.

Now, let me turn the call over to Sheryl Palmer.

Thank you, Jason.

Good morning, everyone, and thanks for joining us.

I'll start today by discussing the current market environment and the beginning of 2019 because I know that's top of mind for most.

Then I'll discuss 2018 and how we finished the year, followed by an update on our integration of AV Homes.

We continue to believe that the current new-home sales environment has been best described as a break in momentum as the industry finds its new normal.

The conditions the industry experienced during the back half of 2018 in regard to interest rates, affordability and the resulting press coverage led many potential buyers that had been in the market to take a wait-and-see approach.

This coincides with what we felt as well with reduced traffic, but the more significant impact appeared to be a lack of urgency.

The ambivalence felt by customers was reflected in our conversions and further emphasized when considering the conversations on the sales floor versus the overall credit quality of our customers.

Affordability issues have been less of an issue for us across most communities, but instead, a more hesitant and curious consumer given the competitive discounts seen in the marketplace.

As we have shared for the last many quarters, our customers continue to have room with what they can afford, based on mortgage underwriting.

Our average conventional buyer is still able to absorb a rate increase of more than 500 basis points and our average FHA buyer is able to absorb just less than 300 basis points in rate increase before their debt to income ratio becomes a concern.

In addition to the local momentum building each week on the sales floor, there still continues to be plenty of macro data points that give us confidence in the near-term outlook for Taylor Morrison and the homebuilding industry.

Unemployment and job creation are still at historically very healthy levels.

In fact, the U.S. just had its 100th straight months of positive job creation.

Incomes also continued to grow and many of the major markets in the U.S. continue to have limited housing supply just as the industry continues to be underbuilt based on historical averages.

We're collecting countless data points as the spring selling season kicked off, and we believe that the recent trend in the 30-year mortgage rates is a tailwind to start the year.

We believe this will continue with the Fed's most recent decision to hold rates flat and take a more cautious approach to future increases.

With current rates hovering in the 4.5% to 4.75% range, they are in line with where they were during the spring selling season last year and down from 5% during their peak in the fourth quarter.

To assist our customers in overcoming the mental hurdle created by the recent mortgage rate fluctuation and uncertainty, we are using our incentive dollars to provide a financial benefit by offering a national mortgage promotion in most of our communities across the country.

It's a temporary interest-rate buy-down from the 30-year fixed rate.

This incentive provides our buyers that choose to finance their home at Taylor Morrison Home Funding a lower payment with Taylor Morrison paying the interest equal to 2% lower than the locked fixed interest rate the first year and 1% lower the second year.

Currently, the first year rate is brought down to 2.75%.

We have locked rates on the buy-down as low as 4.5% with our customers paying 2.5% in the first year.

One of the many benefits of having financial services within our business is our ability to quickly respond to our buyers and offer national programs such as this, allowing us to put our incentive dollars to work in ways that are most impactful for the customer.

We've received positive feedback from our sales teams and our customers speaking with our mortgage teams, with many homes purchased and rates locked using this promotion.

All positive signs with momentum continuing and once again something we expect to see build as we progress through the spring selling season.

Although we're encouraged by the recent uptick in customer activity beginning in January and are confident in the steps we've taken to ensure future success, we do believe the existing market dynamics, along with the relative importance that the spring selling season has on our near-term outlook, requires us to be prudent relative to providing annual guidance.

Similar to many of our peers, we're going to provide only guidance for Q1 and revisit our thoughts for the full year when we get back together to review our current quarter's results in May.

Now I'd like to take a minute to look back on 2018 because I think it's important to remember and reflect on the many milestones reached and achievements by the team based on our strategic priorities, which included: one, pursuing smart, strategic growth; two, enhancing operational excellence; and three, differentiating our customer experience.

We delivered on all of these priorities during the year.

We grew in a smart and strategic way through the acquisition of AV Homes.

We improved our operations through CRM enhancements, procurement initiatives and centralizing key functions where it made sense, like accounting and purchasing.

And our goal of delivering a more differentiated customer experience was supported through crowdsourcing campaigns and devoting more focus, time and resources to customer research.

With more to come, each of these accomplishments carry with it a common theme of putting Taylor Morrison in a position for future success.

Operationally, we ended the year with 8,760 total closings, which was about a 9% increase from the prior year.

For the quarter, we delivered more closings in any other quarter in our history.

I was also pleased with the sales pace for our legacy Taylor Morrison business in 2018, which was in line with our original annual guidance, although we did see some high cancellations across the brands.

It was a bit higher in the acquired AV business and that brought our overall pace down a little lower than we expected.

Net sales for the year were 8,400, which equates to a pace of 2.3 on our average community count of 307.

Although home sales were down each month in the quarter versus the prior year, December performed the best on a relative basis, driven by sales stabilization in our West Coast divisions and across Texas.

Sales in January continued the trend in week-over-week improvement with continued traction in early February.

Our 2018 EBT margin was approximately 9% when adjusted for the unusual items that took place during the year and 6.5% on a GAAP basis.

Dave will address the specifics of these items as he reviews the broader financial results.

That led to $2.65 of diluted EPS on an adjusted basis, which is an increase of $0.67 compared to 2017 adjusted results and $1.83 on a reported basis.

Before I turn the call over to Dave for the financial results, I'd like to spend a moment providing an update on the current status of our AV Homes integration.

It's been about 4 months since we closed the transaction, and I'm happy to report we are on track with our integration plan and in some areas well ahead of schedule.

There are a number of ways in which we measure our progress and in almost every metric of evaluating this transaction, we have either met or exceeded our internal goals.

We believe the creation of our integration management office paid off and resulted in a more process-oriented approach in each of the expanded markets.

Based on our work to date, we can comfortably take our annualized run rate synergy estimate up to $40 million, $10 million more than originally communicated.

Equally as important as the financial impact, we've also made great progress in these divisions towards creating a one Taylor Morrison approach.

We're excited about what the AV team members bring to our organization and the value-creation opportunities we now have in these markets with increased scale and expanded product focus.

I want to say thank you to all of our team members for the diligent work they've put in assuring the success of this acquisition, and I look forward to sharing our continued progress throughout 2019.

Now I'll turn the call over to Dave for the financial review.

Thanks, Sheryl, and hello, everyone.

For 2018, adjusted net income was $306 million and adjusted diluted earnings per share was $2.65.

On a GAAP basis, net income was $210 million and diluted earnings per share was $1.83.

Our results include unusual expenses totaling $96 million from the AV acquisition as well as costs associated with our Canadian entity unwind and corporate reorganization, land charges and an increased reserve related to remediating a warranty issue.

Total revenues for the year were more than $4.2 billion, including homebuilding revenues of over $4.1 billion.

Home closings gross margin for 2018, inclusive of capitalized interest, was 17.1%.

This figure was impacted by certain items that are worth discussing.

Purchase price allocation for the AV acquisition positively impacted the full year margins by about 13 basis points or $5 million.

This was an improvement from our purchase price allocation guidance last quarter as we've refined our methodology during Q4.

Our margin rate was also impacted about 95 basis points due to a $39 million reserve we took in Q4 to cover expenses related to the warranty issue just mentioned.

Lastly, our decision to prioritize pace in a few communities, including close out communities, during Q4 led to land charges of $9.6 million, which impacted the annual margin about 25 basis points.

Although this decision impacted margin, it was made with a focus on returns.

After accounting for these adjustments, home closings gross margin inclusive of capitalized interest was 18.2%.

When considering just the legacy Taylor Morrison results, this metric was relatively in line with our original margin guidance at the beginning of 2018.

I'm pleased with the legacy margin performance, given the significant headwinds we faced with increased input costs, primarily in lumber, various tariffs and trade labor throughout most of 2018.

Moving to financial services for 2018, we generated approximately $68 million in revenue and just over $26 million in gross profit, equating to a margin rate of 38.8%.

Our mortgage company capture rate for the year came in at 72%.

As Sheryl mentioned, we continue to make great strides in our integration of AV.

Our financial services are active in the legacy AV communities and Taylor Morrison Home Funding and our title company, Inspired Title Services, has already begun closing loans in each of those new businesses.

Another benefit from the AV acquisition that we haven't spent much time discussing is the commercial assets we acquired.

As you'll see on our financial statements, there's now a new revenue line item on the P&L associated with amenity and other revenue.

This represents the revenue that we're receiving from operating amenities in our 55-plus AV communities.

In addition, there are numerous additional commercial parcels, some of which will serve the business well as future homebuilding communities, while other assets will be sold in the normal course of business.

SG&A as a percentage of home closings revenue for 2018 came in at 10.1%.

This is a 20 basis point improvement over the prior year and represents our commitment to continue gaining leverage as we increase the scale of our business.

In addition to the expenses that ran through our margin line that I've already mentioned, I want to also call out other expenses that hit below the SG&A line on the income statement.

As we guided in our last quarter's call, we had expenses related to the AV transaction and the final repatriation of proceeds from the 2015 sale of our Monarch business in Canada.

As expected, the fourth quarter expenses related to the AV transaction totaled just under $30 million and the expenses related to the repatriation of Canadian proceeds was split into 2 parts, with 1 part at about $20 million that hit above the tax line and another $15 million that ran through the income tax expense.

Our earnings before income taxes for 2018 were $369 million on an adjusted basis and $274 million as reported.

Reported income taxes totaled $63 million for the year, representing an effective tax rate of 23%.

Even after the AV acquisition, we ended the year with just under $900 million in liquidity, $330 million of that liquidity was attributable to cash on hand and the rest was from our $600 million corporate revolver, which was undrawn at the end of the year outside of normal course letters of credit.

Our net debt-to-capital ratio was 41.9%.

This is an increase from where we had been the last few quarters due to the acquisition of AV but we anticipate working this back well under 40% as we move through 2019.

For the year, we spent roughly $1.1 billion in land purchases and development for both Taylor Morrison and AV.

We did underspend relative to our original 2018 guidance on the TM legacy business and diverted that excess cash to other capital allocation strategies, primarily to share repurchases made since October, which I will cover in more detail shortly.

At the end of the year, we had approximately 57,000 lots owned and controlled.

Due to the acquisition of AV, our percentage of lots owned increased to 77% at year end.

We anticipate reducing this percentage over time back in line with historical averages.

At year-end, our land bank was 5.5 years of supply based on a trailing 12 months of closings, which is consistent with where we've been in recent quarters.

At the end of 2018, we had 4,158 units in our backlog with a sales value of just under $2.1 billion.

Compared to the same time last year, this represents an increase of 19% in units and an increase of 22% in sales value for those units.

In addition, we had 2,315 total specs, which included 614 finished specs.

These levels are higher than we've had in our recent past.

Part of that is due to the elevated cancellation rate in Q4 and part is due to the higher inventory levels expected at the lower AV price points.

We believe these inventory levels put us in a good position for a strong spring selling season as recent momentum continues.

For context, we sold 355 specs in January.

So our teams have so far shown an ability to sell this inventory effectively.

We've spent $196 million repurchasing 11.7 million shares from October 2018 through earlier this week.

Our average stock price for these repurchases was $16.72, which we believe is attractive relative to our tangible book value per share.

Since the acquisition of AV, we have reduced our share count by about 10%.

This means we've effectively repurchased the equivalent of all the shares issued with the AV acquisition plus an additional 30%.

We recently exhausted our current authorization and continue evaluating optimizing our capital allocation strategy in order to drive maximum return for our shareholders.

As we've shared in the past, we are focused on driving free cash flow and investing it to grow the business and enhance value for our stakeholders through share repurchases or debt pay down.

I'll wrap-up by sharing our Q1 guidance.

For the quarter, we anticipate community count to be between 350 to 360.

Closings for the quarter are planned to be between 1,800 and 1,900.

Home closings gross margin inclusive of capitalized interest and purchase accounting is expected to be in the mid-17% range.

SG&A as a percentage of homebuilding revenue is expected to be in the low to mid-12% range.

Effective tax rate is expected to be about 25% and the diluted share count is expected to be about 112 million.

Thanks, and I'll now turn the call back over to Sheryl.

Thank you, Dave.

Before we move to Q&A, I'd like to spend a few minutes covering some of what we're seeing with consumer trends and activity in each of our major markets.

I'll start with an evolving data point with the continued growth of single buyers across the business.

Reviewing our recent shopper demographics, we have seen an increase of approximately 15% to 20% growth in singles and interestingly enough, we're seeing movement in each of our buyer cohorts with particular concentration amongst the Gen Xers and boomers.

The trend that we have seen with the Taylor Morrison customers appeared to be consistent in the newer AV communities as well.

After seeing the uptick in traffic activity from the single segment, we followed up with focus groups to understand any differences in their buying preferences and found them to be generally aligned with couples and families, except that they are more likely to be moving due to a lease expiring than their married counterparts and most importantly, they articulated a greater desire to have security, but not just in the literal sense, but through being a member of a community.

Moving on to the markets.

Let's start with the West and then we can work our way East across the country.

None of our markets were immune to the slowdown in October and November, but the West was a big driver of the stabilization that we saw starting in December.

That led the charge in January and continued to perform well in the first half of February.

Our Phoenix division continues to be a bellwether for the company and while the overall pie in that market continues to grow, our local leadership team has done a nice job finding ways to grow the Taylor Morrison share of the market.

Despite increased negative commentary about the California housing market, our 3 markets in the state were flat on sales in December year-over-year.

Although price appreciation has been a factor across California, supply remains low in certain submarkets and the underlying demand seems to still be intact.

We have seen momentum building in each of our California markets over the last 3 to 4 weeks, although the reduction of the Chinese buyer is still very real in parts of southern California.

Our markets in the central region also saw a pickup in activity during December.

Sales were flat in our legacy divisions, but the region as a whole was up when factoring in AV.

Austin continued to be a standout at all price points, Houston remains consistent and Dallas is finding some traction having adjusted prices at the higher price points.

The economic conditions continue to be favorable in all of the markets we operate throughout Texas, with low unemployment and many cities continuing to attract new employers to the area, driving ongoing population growth.

Although we're excited about the market positions we've built in the East region, it was a bit softer from a sales and traffic perspective during Q4.

The 50-plus buyer was a little later back to Florida but similar to what I've shared in some of the other markets, we have seen improvement in traffic, conversions and overall sales each week since mid-January.

This is obviously the region that has the most positions through the AV acquisition, and we're excited about that differentiation and how it positions the business.

Before I close, I'd like to briefly talk about a few recent accolades and achievements made by the team that I believe further illustrates what makes Taylor Morrison pretty unique.

In early January, we were named America's most trusted homebuilder for 2019 by Lifestory Research for the fourth year in a row.

I'd be proud to earn that award in any given year but the fact that we're the first homebuilder to win it 4 years in a row speaks to the consistency we aim to drive throughout our business and that our commitment to our customers goes beyond simply building great homes.

And for that, I couldn't be prouder.

Shortly after that distinction was announced, Taylor Morrison made Bloomberg's 2019 prestigious gender equality index, showcasing our commitment to advancing women in the workplace.

While our recruitment philosophy isn't tied to meeting quotas, but instead, to always hiring the best person for the job, I do believe that promoting gender equality in the workplace is not just the right thing to do but it's smart business.

I'm proud to share that our male to female ratio is close to 50-50 across the organization and 47% of our middle management is made up of women.

The diversity in the workplace undoubtedly gives us a unique perspective as we serve our customers and appreciate the changes in the buyer makeup across our markets.

Following the Bloomberg announcement, Fortune magazine named Taylor Morrison one of the world's most admired companies based on performance and reputation.

The ranking is based on an independent survey at top leaders from 680 companies in 30 countries.

When isolating the survey results within our own industry, Taylor Morrison ranked #2 in both people management and quality of products and services, while earning the #3 spot and innovation, use of appropriate assets, social responsibility and quality management.

This recognition is a direct reflection of the excellence and dedication that more than 2,200 Taylor Morrison team members demonstrate each and every day.

And lastly, I'd like to mention the most recent news, the addition of Senator Jeff Flake to our Board of Directors.

His proven leadership ability and unique public policy experience will be a tremendous asset to our company as we navigate an increasingly complex regulatory and business environment.

We're truly delighted to have him and look forward to all that he'll bring to our business.

Before closing, I'd like to share that last week 170 of our top leaders came together in Scottsdale for our 2019 Management Conference to align around our priorities and vision for 2019 and beyond.

As we raft our last morning of discussions, outlining what to find leadership in moments of transformation and how we'll achieve greatness together by delivering an exceptional and personalized customer experience, the positive feedback and commitment from everyone in attendance was resounding.

I'm more excited now for our future than I've ever been and I'm grateful to be alongside such talented and capable people that I know will make a difference in our organization, in our industry and on behalf of our customers.

So with that, one last enormous and heartfelt thank you and congratulations to all of our teams.

I'd like to open the call for questions.

Operator, please provide our participants with instructions.

(Operator Instructions) Our first lesson comes from the line of Scott Schrier of Citi.

I wanted to start a little bit on the land and warranty charges and see how you're evaluating your inventory and if we might see some further charges on either.

I know you mentioned some close-out communities.

I'm curious on the PPA accounting as a benefit.

Does that imply that certain assets what were written down or is it something more mechanical?

So just curious how you're -- how we're looking at land from that perspective?

Sure.

I'll start with the impairment one.

First, it's a good question, the call-out, these are on the legacy TM side, the land charges don't have anything to do with the AV side.

That would be captured in some of the fair value work that we did.

But for the charge we took on the land, that was focused on moving a few communities towards closeouts sooner than we typically do.

Then we also had a couple of communities that weren't quite performing as we had hoped.

So we were trying to drive pace, be very focused on returns.

So in total, this was just a handful of communities.

Related to the warranty issue, as you guys know and have seen builders experience these type of issues from time to time.

For us, fortunately we haven't gone through this in several years actually before we went public and that was at the time of a Chinese drywall.

But we believe we're fully reserved for that now at this point, and we actually hope to recover some portion of these costs, however, it's probably not likely in 2019.

Got it.

And then more broadly speaking, some builders are obviously taking a pace over price stance.

You mentioned you've done that in some communities.

It tends to work better in some lower-priced products.

Can you speak to how you're thinking about the balance, understanding that it might be different depending on the market?

But I just want to hear your philosophy on how you're sizing your communities and how you're thinking about the balance, given your higher price points to maximize your returns?

Sure.

You bet, Scott.

You know, I think it's very difficult to declare a single portfolio of strategy but if I had to, the bias would be the pace over price.

We pushed pace very hard early last year and as we did that, we weren't able to get some of the replacement communities online to replace the ones that we were closing out.

But it's important for us to keep the production machine consistent.

It's one of the ways I think that we continue to be a preferred builder for our trade.

So we're going to continue to push units, believe the work that we've done over the last year and the opportunity with AV on the enhanced scale only continues to benefit that.

We're not going to destroy margins, but we will continue to push pace.

We'll focus on gaining scale in each of the markets, generating cash, leveraging our overheads, enhancing the returns.

Having said all of that, I believe we have some high-quality locations in the business and within the TM brand, and some of the locations we still do have the opportunity to get price, and in those communities we would strive for both.

Our next question is from the line of Stephen East of Wells Fargo.

On the orders side, you talked about the nice pickup that you've seen in January and February.

Couple of questions on orders.

One, how would you compare that to seasonal -- typical seasonal trends there?

And then could you just talk a little bit about your different segments as far as how active adults performing move up entry-level, et cetera, on that?

And I'll stop there.

Yes, you bet, Steve.

If I think about the end of the year, as I mentioned in my prepared comments, October and -- the fourth quarter was tough.

October was barely down, November was really where we saw our greatest dip and December was slightly up.

What we've seen since then probably mid-January, I would say, since the 3rd week of January, we've seen week-over-week improvement.

We're actually seeing it across all of the consumer sets.

If I look back to the end of the year, I would say in Florida, we definitely saw the 50-plus buyer coming back a little later.

So market by market, we saw different levels of noise.

But what we've seen really is pretty consistent traction across the business.

As I've tried to isolate it by consumer group, even in the fourth quarter, Steve, I would tell you that it wasn't the high-end that we saw the reduction versus the low end.

In fact our pace was the lowest in our AV communities at the lowest price points.

But yes, almost have to peel back the onion market by market because they're -- Houston is a great example.

The 200 to 500 market is very healthy.

The over 700 market is very healthy.

The 500 to 700 is really where we felt the most turbulence.

So every market has got like a little niche but then you move it obviously submarket to submarket.

Fair enough.

We saw the same thing in Houston.

If you turn to your synergies, I mean, that's a big bump up, which is great.

Could you all talk a little bit about what's driving that?

Then maybe, Dave, where the synergy buckets are occurring?

Yes, you bet, Stephen.

So we previously guided to the $30 million.

We're bringing that up by $10 million to $40 million now.

And that original breakdown was about 2/3 in overhead and then other 1/3 was primarily mortgage, insurance, national rebates, just to name a few.

That $10 million increase is kind of being driven across all categories, most notably though in the overheads and on the national rebate side.

So we're still working through it.

We're hopeful that we might actually be able to heat this up a little bit more in the coming quarters.

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

Sheryl and Dave, I wanted to circle back on the orders again and understanding there's a lot of moving pieces, particularly with the addition of AVHI.

Could you give us a sense of a couple of different things?

One, how many orders did AV contribute in the fourth quarter?

And then when you're talking about January and February, can you give us the year-on-year change in orders?

And if possible, breakdown from a legacy basis or organic basis what that represents?

Yes.

Let me try to give you some color, Scott.

As of the end of the year, we actually have a blended business, all the signs are changed and TM is -- AV is now TM.

When you look at the fourth quarter, a couple of things happened.

We -- as I think I said in my prepared remarks, our sales pace for Taylor Morrison was generally in line with our expectations at the beginning of the year, our original guidance.

We did, in the fourth quarter, see some softening across all communities but we definitely saw a greater softening and the orders in AV were -- at the lower price points were probably 20% less than Taylor Morrison.

Now we had anticipated a fair amount of that in our underwriting, so a number of things happened.

One is I think you had just the softening in the market.

Two, it'd be naive for me to say there weren't some integration impacts and some repositioning that we did, I think we spoke about that last quarter, in a number of our communities.

Three, and probably the greatest impact, is we really did have to clean up their backlog.

So when I'm looking at the numbers, I'm really trying to partial out the gross versus the net.

Because on a gross basis, actually not bad.

But our cans were up about 50% in the quarter, part of that, like I said, was cleaning out the backlog, the business approach was slightly different.

So that was a chunk of it.

And then, obviously, as we move into the first of the year, we've got some pretty tough comps.

But as I look, like I said in my last -- I think in the last question, as I look at what we've seen over the last 4, 5 weeks, we're actually seeing momentum across all of the price points, all of the brands, and we've really tried to blend Taylor Morrison and AV together.

Got it.

Okay.

And then my follow-up question just around the incentives and it sounds like there's been a particular emphasis on year-end on the rate buy-downs, which I think is interesting.

And I was hoping to get a sense of 2 different things.

One is, can you help us understand the magnitude of margin impact either on dollar percentage basis of that type of rate buy-down program?

And then second part is just outside of the rate buy-downs.

What do you think are the -- are proving to be the most effective incentives today?

Yes, that's a great, great question, Mike.

So a couple of things there.

As far as -- let me go right after and Dave jump in here if I articulate this incorrectly.

But as far as the margin impact, actually there's not, because all we're doing is putting the dollars to use slightly differently.

What this national promotion has done has allowed us to align our incentives to the benefit of each customer's needs.

So yes, it's a national promotion and yes everyone has the opportunity but I would tell you that a percentage of the customers are taking advantage of this, some may be taking advantage of a permanent buy-down with those same dollars.

Some -- their bigger need is cash out of pocket.

So what it's allowed us to do is really have the dialogue with the customers and respond to their individual needs.

What it's also done is generate great traffic and getting the traffic in the door to have the conversations and then personalize a program that works for that buyer.

Our next question is from the line of Alan Ratner of Zelman & Associates.

Sheryl, congrats on those accolades you rattled off there, very impressive during the quarter there.

So I guess just following again on the cancellation topic.

I think that it's an interesting point you brought up because I do feel like we see this typically in a lot of M&A transactions that there is some cleansing of the backlog that tends to go on.

And maybe that got lost a little bit looking at the net numbers.

So do you have the actual can rate for us?

And maybe on a gross basis might be the better way to think about it, do you have what those trends look like for the quarter into January for the company?

Yes, the can rate for the quarter was 20% for the total company.

And last year, same quarter was 13.5%.

So there's my 50% up.

But when you put units to that, you know, which isn't hard to do, Alan, that really generates my comments around growth sales versus net sales.

So that's gets me, I'm looking at gross up -- gross orders up probably up about 8% year-over-year, which would probably be more aligned with what people would have been expecting on -- at least on a net basis.

So is that a good number to think about for January as well in terms of what you've been running at?

Yes, I mean, the cans are slightly down, which is good news.

I think just in general and you'll see this across our peers, as you move into this entry-level phase, you just gin more contracts.

So I think the days of our average can rate, 10% to 12%, might tick up because I think that's just -- that's consistent with this buyer group.

You just -- you write more deals to get them to stick.

But I think in general, yes, that's about right.

That makes sense.

The second question, I noticed your community count was about 10% higher than what you had guided for.

So I was curious if there was any changes.

I know you mentioned last quarter some repositioning of communities and things like that.

Looks like your active count was higher.

So can you just give us an update on where you are with that repositioning and how we should think about that community count versus the prior guidance?

Yes.

So I think it's tailored a couple of stories, right?

Some of it unfortunately will be the reduction in sales and fourth quarter will slow down some closeouts.

That's probably a good contributor or the primary contributor to it.

When I think about what we have had, I mean as I go market by market, there's absolutely some noise in the community count, as you know this is just about the hardest thing we guide to.

But when I think about the volume of openings that we have this year, I mean, this will be our largest year of community openings that we've really ever seen as an organization.

Having said that, we have a boatload of community closings as well.

So I think we'll guide to the full year as we get into the next quarter, but I think we're going to generally stay par as I think about new openings and closeouts.

Okay.

That's helpful.

And if I could just sneak one last one in?

Sheryl, can you just talk quickly about what you've seen across the industry, January, February on the incentive environment and pricing?

We heard from some of your larger competitors 6 weeks or so ago just about potentially being very aggressive and since then we've heard some more positive chatter about traffic and sales.

So has there been any pullback on some of the incentives that were being offered through the industry thus far through the first 6 weeks of the quarter?

You know, Alan, unfortunately you're not going to love my answer, but it is so market-specific.

There are some places where the incentives are very aggressive and it all is correlated to the level of inventory the builders have.

In others, I think, where there has been some momentum and traction, we have seen -- I mean I think you heard us as well as other builders say that incentives from a closing perspective were down.

I'm not sure that really speaks to the sales environment.

Our incentives were down in the quarter year-over-year and in January slightly as well from a closing perspective.

Some markets were a little more aggressive and some we've been able to pullback and I would expect that balanced approach is what you're seeing.

But I do think there is bias across the sector.

If people came into the year with increased inventory, they're going to do what they need to do to move it.

And that -- recognizing that behavior is just what drives some of our land decisions because you know that's going to happen and so you want to be able to sell on something beyond price and that's why quality of locations is so critical.

Our next question is from the line of Nishu Sood of Deutsche Bank.

I wanted to go back to the purchase accounting adjustment.

It's about a 40 basis point tailwind to margins and just with the change in the review of the assets, and -- so what kind of tailwind do we expect for 1Q?

Will it be about that 40 basis points range?

And what might it be for the year?

You know, Nishu, I'll give you the Q1, we'll wrap in the year hopefully next quarter when we come out with the annual guidance.

But I want to point out 2 things.

One, the PPA does provide a benefit but at the same time, the legacy AV margins have kind of been at mid-teen -- mid-to-high teens.

So there's kind of that inherent drag there as well.

So they actually have the ability to somewhat counterbalance each other.

So if you kind of look to where we're guiding to in Q1, it's at mid-17% on an adjusted basis, when you take out some of those unusual charges that we had around warranty and the land charge.

We're going to be on kind of that consistent run rate into Q1 and then as we move forward there, we'll readdress that next quarter.

Got it.

Okay.

So a similar kind of factor amount in 1Q compared to 4Q?

Yes.

It could be.

It's obviously the level of closings that come through in that business that ultimately will drive that amount relative to the penetration to the legacy TM side.

But I don't -- I'd hold the run rate for now.

Okay.

And then on land spend, I think you mentioned a combined AV and legacy Taylor land spend of about $1.1 billion for '18 and if I heard that correctly, what -- how are you thinking about '19?

The market outlook has been choppy, but obviously, you sound optimistic based on the recent pickup in demand.

Would you intend to spend something similar to that level?

Or perhaps less as you continue to draw down the land supply?

Well, I mean I think we'd have to look at -- we're trying to balance somewhere around that 5 years of supply.

I think it's going to depend somewhat obviously on the order environment.

We -- at times we will act a little bit contrarian, if we see a good deal, we'll take advantage of it, just like you saw us do in many markets, Phoenix, Austin, Houston to name a few.

But I think the $1.1 billion, you also got to think about, that includes AV just for one quarter.

So again, it's going to be dependent on market conditions, what's out there from a land seller environment.

I would say the land sellers maybe aren't as active right now because they see some of the softness in the market, but as we all know that could change in a quarter's time.

For us, it really just comes back to capital allocation and putting the dollars where we think its best use is and that is first and foremost reinvesting back into the business.

And then, we'll look at other opportunities as you saw in the fourth quarter and in the first quarter, we were pretty aggressive on share repurchase.

In fact, we kind of went through and we bought back all the shares we issued in AV transaction plus another 30%.

So we did all that without getting into our revolver at the end of year.

So for us, it's just going to be that continual management of the capital allocation.

And I think that's spot on.

The only thing I'd add to that, Nishu, is at some level, Dave said it well that we tend to operate contrarian, we've seen a lot of people exit the market, which does create opportunities.

And we've also seen some land sellers start to get a little religion about what's happened.

So we never leave the land market, but we'll -- we continue to be very selective and generally what we do in the times like this is we do a lot more sensitivity testing as we look at our underwriting.

But I agree with Dave, I think, given the fact that we're going to have AV in there, you might see some shift in how much is spent in development versus acquisition because we'll continue to develop.

We're in a really good place.

I mean, '19 we're bought out, obviously, '20 we're close to

We're nearly bought out in '20 and just a little bit of work in '21.

So we're in a very good place.

We can be selective.

Our next question is from the line of Carl Reichardt of BTIG.

Sheryl and Dave, you talked a bit about the specs you're carrying, finished specs and I'm just trying to think about as you go forward with AV as larger part of your mix, what level are you comfortable with in terms of finished spec per community or overall specs per communities -- per community?

Well, we look at it.

We're probably a little bit higher than we are normally.

Some of that is definitely driven by the legacy AV business, typically there's more specs there, given the price point and then obviously, the -- little bit of the softness we saw in Q4.

So our spec count is probably bit higher than we would hope.

But we've been successful in selling that through.

We commented in the prepared remarks that we've sold a little over 350 of those specs.

In addition, we slowed the starts around spec several months ago.

So we expect that to kind of even out as we get through the first half of 2019.

But we typically say we're 4 to 5 specs both in process as well as complete with AV, we're probably going to be on the higher side of that if not above.

So we're running about 6.3 right now.

That's probably somewhere where we would expect to be on a go-forward basis.

Yes.

And we would expect that most of the AV business will continue as a spec business.

So if you take that piece of it and say our normal has been 4 to 5, this could easily be 5 to 7, that's going to blend somewhere around where we are right now.

The opportunity will to be -- to make sure that we still are very, very true to our finished spec philosophy and selling those early in the process.

Okay, great.

I appreciate that.

Because with the deal, we're -- it's hard to know sort of what's the market, what's the deal and how that changes.

So thank you for that.

And then Sheryl, you talked a little bit -- both of you talked about land and developers.

Can you talk a little bit about the trades given there?

I think they're are sort of more viscerally seeing things change.

How are they responding in terms of pricing?

How's the availability particularly with framing?

Yes, you know, I'd say as we finish up the year, we still see some of that continued labor pressure as typical with year-end.

But things are and have moderated a little bit.

So we're hopeful, we'll see some of that pressure pull back.

I would say, we'll probably still see some of it maybe at quarter end, but when you look at some of the input costs, I think, it works a little bit in our favor right now, when you look at what's happened with lumber and OSB.

Obviously, still some risks around tariffs, but something like labor is something we watch pretty closely.

And I would say we just -- and I know we talk about this every quarter, but this is our new normal.

I mean, this isn't going to solve itself and it's slightly different in each of our markets.

If I look at Phoenix, for example, right now, most of the builders in Phoenix are experiencing 60- to 90-day delays in delivering lots because the underground and concrete trade partners' capacity is most challenged here.

In other places -- it's our framers.

And other places like Florida, we can't get roofers.

And so this is kind of what we do each and every day and sometimes it's unexpected and Florida certainly has been one where the roofing challenges actually cost us deliveries in the quarter but generally we're able to manage through these bumps.

Our next question is from the line of Jay McCanless of Wedbush.

So the first question I had on the east, very good order performance there, but since your footprint this year with active adults that you got it from AV is a lot different I think than your footprint was last year, can you talk about the demand in active adult versus the traditional housing business?

Yes.

I don't know that I have anything new to add, Jay.

I think, as I said, in the fourth quarter, we felt it across all consumers.

I think as we saw some markets -- stock market volatility that hits us in a couple of places that generally hits us with the active adult and it certainly hits us in the day when people are using RSUs and options to buy houses.

But as it -- and so we saw the 50-plus kind of the shoulder season come back a little later.

November, December was absolutely softer than we would've expected in Florida.

But we've seen that momentum pick up and we've also seen that with the active adult business in the Carolinas.

Interestingly enough, as you know, the portfolio differences is the 50 -- TM's 55 business generally a little higher price points than the AV, but they performed in generally the same.

And that's what we're seeing early signs of.

But I'll be in a much better place to really talk about that in the next quarter when we really see the spring performance.

Got it.

And then the other question I had, the inventory home numbers that you guys gave in the release, how much of those were legacy TM versus AV Homes inventory homes??

You know, as Sheryl said, we've kind of moved to the combined business.

I would say it's just more proportionate though to the relative side of AV.

And the only exception to that would be what we already discussed, Jay, and that is we tend to carry at the lower price point more specs.

So maybe you give the AV side a slight uptick but I wouldn't say it's meaningful.

Our next question is from the line of Matthew Bouley of Barclays.

I wanted to follow-up on the incentive discussion and just thinking historically, Sheryl, when you think about prior periods of where there's been pauses around interest rates and kind of a need to incentivize, how long do incentives typically stay in the market in your view?

So really, how quickly can you pull back as demand continues to get traction as you mentioned?

Or to some degree, is there kind of momentum behind incentivizing at this point that you feel might take a bit longer to work through?

Yes, it's a really good question, Matthew, because is there a norm from past cycles?

I can think the dark days and those incentives took years and then I can think some of these markets bumps we've seen over the last 5, 6 years.

We've seen them in Phoenix and that lived with us for about a year and then the market took off again and I would say as the market took off, incentives really went away in the market.

I compare that to a market like Houston, where incentives have always, in my 30 years in this business, good and bad markets, incentives have always been a critical part of the sales formula.

You almost increase the base price to incentive because the size of the incentive really matters there.

And so you won't see those back off at the same level even if the market improves.

If I think about Austin, where we also had what I would call a mini cycle about 3 years ago, those came and left as quick as anyone I've seen.

So I wish I could give you a book answer but probably 6 to 12 months all things being equal.

Okay.

That's really helpful color.

And then I just wanted to ask quickly on the community count just beyond the first quarter guidance, is it possible to elaborate it all directionally on your community growth plans in 2019?

And I guess regionally, how that might be weighted?

Yes.

I can try to give some color.

It's hard to get too specific, but just like we talked about some of the community count, some of the communities that were supposed to come to market and parts of Florida that had a number of different delays, we're going to see some growth there.

So when I look -- when I look at the East, I think we're going to generally stay pretty -- we're going to be opening a lot and closing a lot.

I would say Central would be about the same.

When I look at the West, I think that's going to be one of timing, we have a number of -- so we have a number of communities opening and then close out towards the end of the year.

So it really will depend on kind of sales pace.

But generally, I would say, you're going to see general replacement of closeouts with new communities and maybe a little growth on top of that.

Our next question comes from the line of Michael Rehaut of JPMorgan.

This is actually Maggie Wellborn, on for Michael.

I just wanted to quickly follow-up on an early question.

I was wondering how has the improvement in January and into the beginning of February that you talked about compared to normal seasonality?

So you would normally expect, we've always said in this business, that sales would really start coming after the Super Bowl and I would tell you that last year, they came a little earlier and this year, we felt the momentum before the Super Bowl as well.

So I would say it's -- that was kind of my opening comment about this finding this new normal because I don't think we're going to experience the kind of break the gates down that we saw last first quarter but I'm encouraged by the momentum.

I mean, we have some really tough comps we're working against.

I mean we had probably one of our best quarters historically, certainly over the last many years, last Q1, but the trend feels much more like I would expect from seasonal norms.

We should start -- we should see real volume picking up over the next 6 to 8 weeks.

And our next question is from the line of Alex Barrón of Housing Research.

I'm not sure if I missed it but can you comment on the land impairments, where that was as well as the warranty issues, what those were related to?

Yes.

We hit that earlier on but just maybe to recap for you on the land charge, it was a bit in the West but primarily in the East.

They were all legacy TM and that was a couple of communities that we're just moving to close out a little bit sooner and then a few that just weren't performing where we had hoped.

So we're just trying to drive returns there.

But like I said before, it was just a handful of communities.

And then on the warranty side, that's one that -- we haven't had one in a while but we're fully reserved for that and we hope to recoup some of those costs, but probably not in 2019.

That's in our Central region.

Yes.

Okay.

But it was weather-related or it was more like defects or what?

You know there is a technical -- it's pretty technical that would take a long time to walk through but we can walk you through it in our after call.

And this does conclude our Q&A session.

I'd like to turn the call back over to Sheryl for any closing remarks.

Thank you for joining us today.

Appreciate you spending this morning with us.

I wish you a great week, and we'll talk to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the program.

You may now disconnect.

Everyone, have a great day.