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Meritage Homes (NYSE:MTH)
Q4 2018 Earnings Conference Call
Jan. 31, 2019 10:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to the Meritage Homes fourth-quarter 2018 analyst conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brent Anderson, vice president, investor relations. Please go ahead.

Brent Anderson -- Vice President of Investor Relations

Thank you, Daniel. Good morning and welcome to our analyst call to discuss our fourth-quarter and full-year 2018 results. We issued the press release after the market closed yesterday, and you can find it and the slides that we'll be referring to during this call on our website at investors.meritagehomes.com or select the Investor Relations link at the bottom of our homepage. I'll refer you to Slide 2 and remind you that our statements during this call as well as the press release and slides contain forward-looking statements, including projections for the first quarter of 2019 operating metrics, such as order trend closings, revenue, margins.

Those and any other projections represent the current opinions of management, which are subject to change at any time and we assume no obligation to update them. Any forward-looking statements are inherently uncertain and actual results may be materially different than our expectations. We've identified the risk factors that may influence our actual results and listed them on this slide as well as in our press release and most recent filings with the Securities and Exchange Commission, specifically our 2017 annual report on Form 10-K and most recent 10-Q for the third quarter of 2018, which contain a more detailed discussion of the risks. We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release or presentation as compared to their closest GAAP measures.

With me today to discuss our results are Steve Hilton, chairman and CEO of Meritage Homes; Hilla Sferruzza, executive vice president and CFO; and Phillippe Lord, executive vice president and chief operating officer of Meritage. We expect to conclude the call within about an hour and a replay will be available on our website about -- approximately one hour afterwards and remain active for approximately two weeks. I'll now turn the call over to Mr. Hilton to review our fourth-quarter and full-year results.

Steve?

Steven Hilton -- Chairman and Chief Executive Officer

Thank you, Brent, and welcome to everyone participating on our call today. I'll begin on Slide 4. We are pleased to report our full-year results and strong earnings growth despite soft fourth-quarter sales. The first half of the year was good, followed by a choppy third quarter and a slower fourth quarter.

Even so, we met or exceeded the expectations we've shared in our guidance at the beginning of 2018. For the full year, our total home closings were up 11% year over year. We expanded our gross margin by 60 bps over 2017 despite continued cost pressures and the lack of pricing power in the last half of the year as we are beginning to realize more operating efficiencies. Earnings grew 14% before taxes and 59% after taxes due to a lower tax rate.

And our diluted EPS was 64% -- up 64% for the year after a reduction in our diluted share count from the repurchase program we completed in the fourth quarter. We repurchased and retired about 2.6 million shares for $100 million in total at an average price of $38.71 per share, which was a good value considering our book value per share is now $45.20. We also strengthened our balance sheet during the year, ending the year with $141 million more cash than we had at year-end 2017, and increasing our stockholder's equity by 9% even after the share repurchases. The net result is that we reduced our leverage in terms of both debt to capital and net debt to capital ratios.

Turning to Slide 5. Home-building activities slowed in the later part of the year, which comes as no surprise to anyone who follows the industry. We noted back in October when we reported our third-quarter results that the market had softened, especially among [Inaudible] new buyers who seemed to be pausing before committing to a home purchase. That continued through the end of the year, so the near-term outlook is unclear.

However, despite slower sales and an increase in cancellations during the fourth quarter, our total orders for the year were up 2% over 2017. I'll note that our January orders are running slightly ahead of last year's, but we wouldn't read too much into that yet. Considering the price sensitivity of buyers, we're adjusting incentives as needed to maintain a pace that effectively leverages our overhead. The margin improvement we're achieving are due to operational efficiencies rather than holding on to prices.

We remain confident in long-term opportunities for the home-building industry, considering the underlying drivers for housing demand remained strong. Economic growth in household formations and more jobs and higher incomes, strong consumer confidence, combined with relatively low inventories in homes for sale, and the prospect of interest rates stabilizing should continue to drive demand. With that as a backdrop in mind, we will defer sharing our projections for the full year and 2019 until we report next quarter after we can more adequately asses market conditions with the benefit of the Spring selling season. Turning to Slide 6.

I'm pleased with our progress toward strategically repositioning our product to focus on the first-time and first move-up buyers as we believe they are the largest and most active sectors of the housing market today and will be for many years to come. As we already had a large first move-up business, we've been actively growing our presence in the entry-level market, and have acquired a significant new lands positions targeted at those buyers over the last couple of years. 85% of the new lots we put in our control in 2018 were for entry-level homes and about one third of our active communities were classified as entry-level as of year-end 2018. These communities made up 41% of our orders in 2018 since they're selling at a faster pace than our move-up homes.

Our orders for entry-level homes grew about 25% in 2018 while the first move-up was flat and second move-up and others decreased by 35%. That's a significant shift from our traditional business, which is about 75% move-up homes just a couple of years ago, including first and second move-up and beyond. But our strategy goes far beyond simply purchasing less expensive lots. We redesigned our homes to make them more affordable while still including the standard Meritage features like our high-energy efficiency and M Connected smart home suite, along with upgraded finishes and appliances to appeal to a broader range of buyers, who are looking for more than just a basic no-frills starter home.

We've simplified and streamlined our construction sales process to better serve our customers and to make it easier for our trades and suppliers to work with us. We believe this strategy provides for a more efficient cost structure due to a less complex homes, fewer plan variations or SKUs and starting more homes on spec-basis so that our trade partners can be more efficient. It also enables buyers to move into their homes quicker, 56% of our closings in the fourth quarter were from specs, compared to 47% a year ago and our backlog conversion rate hit a six-year high at 76%, compared to 68% in the fourth quarter of 2017. We're also beginning to capture efficiencies in the back-office as a result of simplifying and streamlining, which will help us reduce overhead costs and improve our SG&A leverage in the future after incurring start-up costs in 2018 related to the strategic conversion.

I'll turn it over to Phillippe to discuss our sales trends in more detail by market. Phillippe?

Phillippe Lord -- Chief Operating Officer and Executive Vice President

Thank you, Steve, and good morning. Slide 8, I will begin by recognizing the tremendous efforts of our teams to complete and close over 2,500 homes in the fourth quarter. That's the most homes we've closed in a single quarter going all the way back to 2006, and an 11% increase over the fourth quarter of 2017. We are proud of the accomplishment and the differences that they made in those 2,500 families' lives.

We're also proud to report that our customer satisfaction scores, as measured by total home-buying experience reported by Avid, were up again in 2018 and remain among the best in the industry. We invest a lot of energy and money to deliver a positive home-buying experience. And buyers are, obviously, happy with the overall experience in addition to getting beautiful new homes for their family. Slide 9, it's no secret that the fourth quarter was a more challenging selling environment than what we've seen for many years, especially in October, which was down 20% compared to the fourth quarter of 2017 while November was up 1% year over year and December was just 4% lower than 2017, which was unusually strong.

After seeing home prices increase further through early 2018 and then during several rounds of interest rate hikes, buyers paused to reassess whether this was the right time to purchase a new home. For some, that was an issue of affordability, but for most, it was a psychological reaction to price levels and an uncertain market. This was most apparent in California, Colorado, and Dallas, where prices have risen the most in the past few years. Our traffic levels remain healthy and even our growth sales were relatively consistent with the fourth quarter of 2017, indicating consumers are still interested in becoming homeowners, but we saw an increasing cancellations that reduced our net sales.

It also meant that we didn't close out of communities as soon as we expected to, so our absorption pace was off even more significantly than our order numbers. Orders were off 8% year over year for the fourth quarter, but absorptions on average per community were 15% lower due to the distortion from these near close-out communities. As we close out those communities in 2019, we would expect our total community count to decline somewhat through the year. The slowdown was most pronounced with higher priced homes in move-up communities, where buyers were nervous about selling their existing homes and stepping into a new home at a potentially higher mortgage rate.

With our miss -- mix shifting more toward lower-priced homes, the total value of orders in the fourth quarter was 15% lower than a year ago. While it was a broad-based volume in the market overall, there were significant differences between markets. A few of the hottest markets last year fell back to more normal absorption pace while others remain relatively steady, while -- which I will cover shortly. With most uncertainty comes more competition, and we must excel at delivering what our customers want, which is a quality home at a good value.

As we adjust to changing conditions, we are focused on improving our overall execution at every level. I'll discuss our project's progress in each region and provide a little more local color beginning with the East region on Slide 10. Slide 10, after a 47 year-over-year increase in the fourth quarter of 27, our East region orders were 5% lower in 2018 and 6% less in total order value. This was primarily due to a 19% lower absorption pace for the region.

Florida accounted for most of the year-over-year decline in the fourth quarter of 2018, since the fourth quarter of 2017 includes orders that had been delayed due to the hurricane in September but rebounded in the fourth quarter. That made for a difficult comparison in 2018. Outside of Florida, total orders for the East region were flat in the fourth quarter, though Tennessee's absorption has softened more than others. Overall, the region is slow -- showed solid growth for the full year.

We are confident in our product and location and believe we have opportunities to continue to improve our sales execution and reduce our cost and cycle times, expand our margin and get our performance metrics up to levels we're achieving in our other regions. We're focused on continuing to make these improvements across the board. Slide 11, Central region. Moving to Texas, the word I would use to describe it is generally -- in general, is steady.

Orders increased 2% on flat absorption year over year. Austin, San Antonio, and Houston continued to perform well. We still have quite a few second move-up communities in Dallas, but we have recently begun opening more LiVE.NOW. communities, which are seeing good demand.

Slide 12, West region. Our West region orders were down 19% year over year for the fourth quarter as declines in California and Colorado offset strengths in Arizona. Arizona's fourth-quarter orders were 12% higher than 2017, reflecting strong demand for entry-level communities here, and we believe that spells great growth potential for the next decade. As most of you are aware, the California housing market fell toward the end of last year after producing among the highest absorption in the company over most of the last seven years as interest rates increase had a greater impact due to the higher average pricing there.

On top of these industry-level issues, our average community count was down 30% year over year in California, resulting in a 56% order decline. We're rebuilding our positions in California with more affordably priced communities that should experience higher absorptions. Colorado's orders were down 10% year over year in the fourth quarter as higher interest rates made high-priced homes unaffordable. It remains a strong market and we believe we are well-positioned there after opening many new, affordable, and well-located entry-level communities.

I'll now -- turning to Slide 11, direct cost savings. Finally, I would like to take a moment and address our direct cost trend, specifically lumber, which was a big concern in the first half of 2018 and something, I think, we've managed well in the back half. The savings we're capturing will help offset the impact of increased incentives in 2019. Overall, most components we purchased have remained steady and consistent in price or dropped slightly over the last 90 days.

There are few specialty lumber components in the West that have increased, but those increases are minimal. Since the market began to decline in August of 2018, we have recaptured all of the previous lumber cost increases from January through July. The bulk of these cost reductions were negotiated in Q4 but the first closings to benefit from those cost savings will be in the first quarter of 2019 and should continue through the remainder of the year. I will now hand it over to Hilla to review some additional details regarding our financial performance and our balance sheet.

Hilla?

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

Thank you, Phillipe. I'll cover our fourth-quarter results in a little more detail and highlight the strength of our balance sheet, which has always been a primary focus for us and is even more important now if you're uncertain about the near-term outlook for the housing market. Slide 14. We generated strong earnings growth in the fourth quarter and for the full year of 2018 despite the tougher market conditions over the last couple of quarters.

Our net earnings of $75.5 million or $1.91 per diluted share for the fourth quarter of 2018 more than doubled the prior year's fourth-quarter net earnings of $35.6 million and diluted EPS of $0.87. 112% increase in net earnings and 120% increase in diluted earnings per share in the fourth quarter resulted from 11% growth in home closings, translating to an 8% increase in revenue with an 80 bps improvement in home closing gross margin. Net earnings benefited from our lower tax rate and the share repurchases accounted for $0.05 of an increase in our diluted EPS for the quarter due to lower dilution. We were able to offset the negative impact of a higher lumber cost that flows through our fourth-quarter closings through a combination of cost reductions in other areas, home price increases taken earlier in 2018 and the favorable mix shift toward entry-level, which has a higher average profit margin.

We lost some overhead leverage as closings were lower than we had initially anticipated due to slower sales in the fourth quarter when we held SG&A to 10.6% of home closings revenue in the fourth quarter of 2018, compared to 10.4% in the fourth quarter of 2017. After year-end, we made some personnel reductions to properly size the organization for current market conditions and eliminated manual or redundant processes as a result of streamlining and simplifying our business. We recorded charge in the first quarter of 2019 for these reductions but expect to experience lower cost for the remainder of the year due to these actions. RAM profit swung from positive $2.9 million in the fourth quarter of 2017 to an $825,000 loss in 2018, which includes $2.2 million of random impairments.

Our expected tax rate was 18% for the fourth quarter of 2018, compared to 58% in the fourth quarter of 2017. We incurred a charge in the fourth quarter of '17 for the revaluation of our deferred tax asset as a result of the lower tax rate enacted under the Tax Cuts and Jobs Act of 2017. Without that charge, the tax rate was 34% for the fourth quarter of '17. Our tax rate for the fourth quarter of 2018 was lower than the expected corporate blended rate of 24% to 25%, primarily due to two factors: first, the additional tax credit from 2015 through 2017 closings after a reaudit of our energy efficiency qualifications; and second, a favorable adjustment from the true-up of our DTA evaluation.

Our lower effective tax rate compared to our peer groups is sometimes overlooked, but we want to emphasize that it is the direct result of the way that we design and build homes as well as the diligence of our teams to pursue the associated energy tax credits we earned. I commend them for their work and the results. After repurchasing approximately 2.6 million shares of our outstanding stock with the $100 million authorized by our board in the third quarter of '18, our diluted share count for the fourth quarter was reduced to approximately 39.6 million shares, compared to 41.1 million shares in the fourth quarter of 2017. The full impact of the repurchases will be recognized in 2019 and beyond.

Slide 15. We ended the quarter with approximately $311 million of cash and nothing drawn against our revolving credit facility. The $141 million increase in cash over 2017 was the result of $262 million positive cash flow from operations, partially offset by the $100 million share repurchase. We had expected to be cash-flow positive in 2019, which we have gotten down 27 -- 2018 is significant, especially considering that we maintained our lot supply and returned $100 million to our shareholders.

As a result, we reduced our net debt-to-cap ratio to 36.7 at December 31, 2018, compared to 41.4 at the end of 2017. We secured approximately 10,300 new lots in total during 2018, maintaining our lot supply consistent with 2017 but spent $209 million less on land and development in '18 than we did in '17 due to negotiated land purchase terms and less expensive lots in supplier entry-level business. We expect to spend about the same amount on total land and development in 2019 as we did in 2018. We ended the year with approximately 34,600 lots or 4.1 year supply of land, compared to 34,300 lots or 4.5 year supply of land a year ago.

85% of the newly controlled lots from our 2018 acquisitions are for entry-level communities. We ended the year with 2,507 specs completed or under construction, which was approximately 9.2 specs per community, compared to 2,086 specs, an average of 8.5 per community a year ago through our Q4 [Inaudible] count was slightly lower than our third quarter '18 as we pared back spec starts based on market conditions. Approximately 32% of our total specs were completed as of December of 2018, in-line with 31% under December of 2017. Slide 16.

Considering that our backlog entering 2019 was 16% lower than our backlog entering 2018 and 18% lower in total value due to our reduction in our ASPs, our expectation for first-quarter closings in revenue reflected lower starting point. We expect to deliver between 1,500 and 1,625 home closings in the first quarter of 2019 with an ASP of approximately $400,000 and home-closing gross margin 50 to 75 bps lower than the first quarter of 2018 in anticipation of additional price incentives. As Steve noted, we currently anticipate providing full-year guidance when we report our first-quarter 2019 results. With that, I'll turn it back over to Steve.

Steven Hilton -- Chairman and Chief Executive Officer

Thank you, Hilla. In summary, we are pleased with our 2018 results, despite the slowing market in the latter part of the year. And we are confident in our strategy focus on entry-level and first move-up market and simplify our operations to make us more competitive. We are encouraged by the fact that demand for entry-level homes and our LiVE.NOW.

homes remains stronger than the higher end of the market, which we are reducing in favor of more entry-level focus. We are dedicated to our brand promise of delivering a life built better for all of our customers, and we continue to innovate and focus on customer satisfaction, which we expect to drive additional growth and shareholder value. Thank you for your support in Meritage Homes. Operator, we'll now open it up for questions.

The operator will remind you of the instructions. 

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] The first question comes from Michael Rehaut of J.P. Morgan. Please go ahead.

Steve Hilton -- Chairman and Chief Executive Officer

Mike, you're there?

Operator

Mike your line is open. OK. We'll go to the next question. The next question comes from John Lovallo of Bank of America.

Please go ahead.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thank you for taking my questions. First question is you guys mentioned incentive activity picking up. That's pretty consistent with what we've heard from everybody else.

I mean through October, November and December. I guess the question is as we kind of went into January, did you see any ability to kind of reign back on some of the incentives? And how are you kind of thinking about things heading into the spring?

Steve Hilton -- Chairman and Chief Executive Officer

So, we did pull back our incentives on our specs from the fourth quarter as we entered January. But we did have a very successful promotion last weekend, where we offered some incentives, some additional incentives on specs. And it seemed to work out well for us. I would say the incentives are -- for entry-level homes are probably around $5,000 or less, and for move-up homes they're maybe around $8,000 to $12,000.

As Phillippe talked about earlier, we are going to be -- going into this year with some lower costs that we got some money back from lumber, probably an average of about $2,500 a house. And so we think the net impact will be minimal because of the additional leverage we're going to get from these additional sales. I would say we did get some color that we think our orders are going to be pretty good at for January. I will give you a little more color on that.

The month is not over yet, so we haven't tabulated all of the orders, but from what we can see right now, we think we're going to be up in January at least 5%. That said February and March are going to be much tougher comps for us, and it's still too early to sell -- to tell what we can do against those comps for the rest of the quarter.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

OK. That's really helpful. And then going back to the 56% of closings that were attributable to spec, that's a very solid improvement in our view. Where could that number trend over the near term? And where is maybe is the target level for you guys if there is a target?

Steve Hilton -- Chairman and Chief Executive Officer

We don't have a specific target, but some of our bigger brethren, who are more focused on the entry-level market, are 80% or higher. So we definitely believe that we have more opportunity to increase that as a percentage, which will increase our conversion ratio and reduce our cycle times.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

OK. Thanks very much, guys.

Steve Hilton -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Nishu Sood of Deutsche Bank. Please go ahead.

Nishu Sood -- Deutsche Bank -- Analyst

Thank you. I wanted to ask about the kind of monthly cadence over the last couple of months. Obviously, there's been a lot of interest in that. Your -- the weakness in October followed by the rebound in November, December is a little different than peers.

I think generally what folks have perceived is that there was a weakness that accelerated into November and then some stabilization for some folks in December and January. What might explain that? And I know obviously there can be a lot of volatility in these monthly numbers. There's something timing of promotions, availability of inventory or community openings that might have influenced the difference in your trend versus the kind of general trend out there?

Steve Hilton -- Chairman and Chief Executive Officer

Well, as you already articulated there's a lot of variables that go into the year-over-year monthly comps, and that's why we don't really release those numbers every month but we release them quarterly. But we do talk about it when we look back and it does reflect communities opening, it reflects promotions reacting to the market, specific geographies. But as far as our numbers, our October last year was down 20%, November was up 1% for us, and then December was down 4%. And the cumulative of all that, as we've already stated, was negative 8% for the quarter.

But again, the month-over-month numbers I don't think are really that meaningful because there's a lot of variables that go into that.

Nishu Sood -- Deutsche Bank -- Analyst

Gotcha. Gotcha. OK. And then kind of continuing on that line, other folks have been talking about traffic picking up in December and January, don't read too much into that.

You folks are seeing an increase in signups, in orders year over year in January, but you're still saying not to read too much into that. I think you addressed it somewhat, that the comps get a lot tougher, but just wanted to revisit that. I mean, it would seem we've obviously have much more positive indicator to have plus 5% orders in January versus simply traffic trends. So yes, just wanted to kind of get some further thoughts on that please.

Steve Hilton -- Chairman and Chief Executive Officer

I mean, I don't know how much more, I could say. The traffic has been pretty good this year for the first month of the year. It's just a function of being able to convert that traffic. Clearly, there's a difference between entry-level traffic and move-up traffic.

The move-up traffic is taking its time making that decision. But I want to say that we're not going to like -- all discussions from some of our peers, who have already announced or maybe that were a month earlier in their quarter end about pace over price and we're not going to cede market share to them and we're going to be focusing on pace over price as well. And I think we've demonstrated that in January. Well, we are cognizant about our margin and we're going to be smart about it because our margins are a little bit lower than some of those peers.

And we have to be sensitive to that, but the leverage of our overhead is really, really important and we need to sell homes to be able to effectively drive the strategy that we're focused on here.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. OK. Thank you.

Operator

The next question comes from Stephen East of Wells Fargo. Please go ahead.

Stephen East -- Wells Fargo -- Analyst

Steve, you've been talking a little bit about what's going on with pace versus price, etc., and that's really helpful to us. I guess, a few things around the gross margin: one, could you talk what the difference is between finish spec gross margin and your unfinished since you carry about a third for your specs is finished. And then you all beat pretty significantly on your gross margin. You were about 60 bps higher than last quarter and yet last quarter, you said you thought that the gross margin and the backlog was similar.

So trying to understand what that driver was or that big beat and is that repeatable as we go through the first quarter?

Steve Hilton -- Chairman and Chief Executive Officer

I mean, I would just say that -- I'll let Hilla jump on this one -- that in our entry-level segment, pretty much all we sell is specs. So there is no difference between specs and builds because our strategy for entry-level is to exclusively sell specs because basically that's what those buyers want and that's what our competition [Inaudible] and that's what we have to commit. So, comparing margins for entry-level specs versus move-up specs clearly we didn't move-up segment, we're trying to get out of our 2 MU segment. We have 15% of our communities, which are in 2 MU.

And we're going to be probably more aggressive this year than we were last year to price that product to move, and that's going to result in lower margins. But at the same time, the entry-level communities that we're -- we've been opening and we continue to open. In the entry-level segment, the margins are good. We did fall a little -- this is probably more information than you asked me for -- but we did fall a little bit short in the number of entry-level communities or the percentage level of the entry-level communities of the total for the year.

We're at 33%. We expected to be at 35% to 40%, but we did hit our goal of opening 90 -- of having 90 entry-level communities. The challenge was some of the move-up communities didn't close out as quickly, which swelled our community count and drove that percentage down. I would say that as we go into 2019, we expect to get that number from 90 up to about 115 communities at the of the year.

And as I said earlier, those communities are higher absorptions and for the most part, better margins.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

Yes, so just back on a little bit on that on the margin side -- you'll see this when our K comes out in a couple of weeks -- but if you're looking across our regions, the reason why our margins improved, Texas held pretty steady. The West improved notably as did the East. And that's really just -- for the West, it's a story of the entry-level product. It just had a better margin and it was a larger portion of the pie for the West.

In the East, all of these improvement that we've been working on are finally coming through, so I think that we weren't sure on the composition of the mix of home closings when we guided last quarter as to where they were coming from, so we didn't know how to break out the margin exactly and we ended up pushing up to the positive. So the East came in with a stronger performance and the 2,500 closing coupled with leveraging our overhead caused a gross margin increase.

Stephen East -- Wells Fargo -- Analyst

OK. Thanks a lot. And then great to hear that you're cash positive, you think in '19. I guess a couple of things on that.

You're talking about land-spend being a little bit less. Is that you all looking at the market and being less comfortable with it? Is it more optioning or is it something else? And then you have no debt coming due, so do you apply that to share repurchase? Do you sit on the cash? How are you all thinking about that.

Steve Hilton -- Chairman and Chief Executive Officer

Well, Steve, it's all of the above. Certainly, we're well aware what's going on in the market and we're keeping a steady eye on that and we're making decisions on a daily and a monthly basis on where we see the market going. We're continuing to pivot to more entry-level communities, as we said earlier, 85% of lots we bought are for entry-level. We're trying to be more mindful of using options to be more capital efficient.

We're very much focused on improving our ROA and ROE and -- but we do have a debt -- a note coming due next year, $300 million, so we're -- we don't see any reason why we won't be able to refinance that, but we're keeping some liquidity to that and then we want to be -- have liquidity available if certain opportunities arise. So we're managing all that. Regarding share repurchase, we completed the $100 million in one quarter. We'll continue to evaluate whether we want to renew that and follow up with another authorization, but we want to get through this earnings announcement, and we have a board meeting in a couple of weeks.

I'm sure it's something we'll be discussing, and we'll go from there.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

Just one other point, Stephen. I think it's really important to note that because we're shifting so dramatically to entry-level, the cost of lots is just cheaper. So we're able to spend less money and still secure the same amount of lots.

Steve Hilton -- Chairman and Chief Executive Officer

Yes, but the deals are a little bigger.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

Agreed. Agreed.

Steve Hilton -- Chairman and Chief Executive Officer

Right? Because absorptions are higher.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

Yes.

Stephen East -- Wells Fargo -- Analyst

Yes. Gotcha. All right. Thanks a lot.

Steve Hilton -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Michael Rehaut of J.P. Morgan. Please go ahead.

Michael Rehaut -- J.P. Morgan -- Analyst

Thanks. Good morning, everyone. Sorry for the earlier issues with the phone. First question, I just wanted to circle back to the gross margins and answer to your question of Steve, it sounds like the upside on 4Q was largely driven by mix.

But you had also talked about efficiencies that you're starting to get in the East region. Looking to the first quarter guidance, you're shifting -- switching to solidly down year over year or moderately down year over year, driven by the incentives. So, just wanted to get a sense, when you think about going from up 80 bps to down 50 to 100, I believe, sorry, I don't have the numbers right in front of me, is that primarily driven entirely by incentives? And given the fact that incentives, I would assume, increased during the quarter, could this lead to a wider year-over-year delta in 2Q?

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

So, just to clarify that, guidance was 50 to 75 bps so that's where we think we'll probably end up for the first quarter ended partially incentive but it's also partially lower closing volume. We entered '19 with a much lower backlog than in '18 and there was quite a bit of leveraging that occurred kind of right at that sweet spot of 16 bps -- 1,500 to 1,800 homes. So, a part of that lost margin is actually leverage, it's not direct margin, so we don't anticipate sustained level of drive continuing for the rest of the year. Of course, we don't have a crystal ball, we don't really know what the rest of '19's going to look like, but right now it's primarily a function of incentives that we know that we're planning to offer in the first quarter and a lower leverage.

Steve Hilton -- Chairman and Chief Executive Officer

Yes, I wouldn't extrapolate that into the second quarter yet because it's still early and as we said earlier, our orders from the first month are probably going to be up at least 5% and that's going to help with the leverage. So it could be -- that could turn around in the second quarter and beyond. Or -- I'm sorry, at the end of the first quarter's numbers heading into the second quarter.

Michael Rehaut -- J.P. Morgan -- Analyst

Right. I appreciate the clarification. I guess secondly, community count, if you could just kind of recap -- obviously, the change in order patterns with the higher [Inaudible] rates impact the community count in 4Q. You talked about that kind of evening out during 2019.

If you have somewhat of a, let's say, of a low-single-digit order growth type of year in 2019, what would you expect community count to be year-end '19 versus year-end '18 or at least some type of range?

Steve Hilton -- Chairman and Chief Executive Officer

We're projecting right now, at this moment it to be kind of flattish until we can get better color on that at the end of the year -- or at the end of this quarter. It could be slightly down to slightly up. The challenge is in the -- at the end of 2018, we -- our community count was actually a little higher than we expected because we didn't close out as many MU communities as we expected to, which left the community count higher. I believe we have like 32 or 35 communities that have less than 10 lots left in them, and we're trying to drag those to a completion.

Definitely helps with our overhead, so that will bear weight on the overall community count number for us. The number that we're most interested in is the number -- the absolute number, or the net number of entry-level communities that we have open. As I said earlier, we had about 90 at the end of last year and expect to be -- opening another 25 net by the end of this year to get us to about 115. And we expect that number to continue to rise every year for the next several years.

Michael Rehaut -- J.P. Morgan -- Analyst

OK. One last quick one if I could. I just wanted to also just clarify to make sure I understood right. You mentioned that you expect your order comps to be a little tougher in the next two or three months relative to January?

Steve Hilton -- Chairman and Chief Executive Officer

That's correct. I mean, our orders for the last -- for Q1 last year were 2,358 and certainly the orders from February and March were substantively higher than they were in January. So the market is going to get better. The real season kicks off on Monday after the Super Bowl this weekend for housing but the comps get tougher, and we're going to sell more homes to put up a positive number, but it's like that every year.

We have a strategy, we have a series of promotions planned, and we're optimistic that we can continue the good start we've had with the year so far.

Operator

The next question comes from Susan Maklari of Credit Suisse. Please go ahead.

Susan Maklari -- Credit Suisse -- Analyst

Thank you. My first question is just around some of the efficiencies that you've talked to earlier in your commentary. Can you just give us some sense of maybe how much more you can realize there? And then with that, you've certainly done a lot of work with efficiency in the building process, as you move down to more entry level product, can you talk about your ability to kind of continue to capture some of that and maybe what it could mean for you over time, especially as we do think about the margin progressions?

Steve Hilton -- Chairman and Chief Executive Officer

Well, one of the main things we're focused on is that drives efficiencies and absorptions. So as we get our builders or superintendents to be able to build more homes, I think in a lot of markets or smaller markets, the absorption levels are not adequate and that allows us to really leverage our overhead. And as we continue to pivot more and more the entry level, we can leverage our overhead in so many ways. It's our construction overhead, the models that we have, sales presentation, it's our back office.

There's a lot -- the way we're selling home, we have an initiative this year that we're moving our sales office to less paper. We're not going to be handing out as much brochures and paper promotion materials. We're doing more electronically. That could save us $3 million a year.

There are lot of things that we're doing to save money and reduce overhead. Hilla, if you want to piggy back on that.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

Yes. The East that I mentioned earlier, the east region has definitely improved their margins. As you guys have seen a couple of weeks when we published the regional results for the quarter. However, there's still opportunity there.

They're not yet at the company averages and there is no reason why they shouldn't be. So, we still have some ability to increase the margin for the east, which is about a third of our total business. And then of course as we continue to LiVE.NOW., I'm not sure that there is significant efficiencies to continue to ring out of the entry level, but the entry level continues to become a larger portion of our business that will just mathematically become more impressive. And then the lessons that we're learning about how to be more efficient and how to streamline the whole production sales to close the process that we're learning in entry level, we're also carrying it to first move up.

So, you'll be able to start to see some of the efficiencies in the rest of our product line as well in '19 and into '20.

Susan Maklari -- Credit Suisse -- Analyst

OK. That's helpful color. And then can you just -- following up on that, talk a little bit about what you're seeing in terms of some of the trades. Is there anything that's changed there, especially maybe with some of the uncertainty in the market?

Steve Hilton -- Chairman and Chief Executive Officer

I wouldn't say there's any it's really a monumental to discuss the trades. They read the papers too and they see what's going on with the orders and the overall housing market. So, I think price increases in general have been more modest and we're not seeing, there is continuing price pressure and labor issues, of course, but I think it's moderated to some degree.

Susan Maklari -- Credit Suisse -- Analyst

OK. Thank you.

Steve Hilton -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Alan Ratner of Zelman & Associates. Please go ahead.

Alan Ratner -- Zelman & Associates -- Analyst

Hey, guys. Good morning. Nice job in a difficult market. First question, Steve, you mentioned the incentive environment, just to kind of play the flip side to that, curious are there actually any communities these days where you're actually raising prices and maybe quantify that in terms of percentage of communities that maybe where you're seeing stronger demand?

Steve Hilton -- Chairman and Chief Executive Officer

There are some that we are modestly raising prices. I can't tell you how many of them there are and what percentage that is. But clearly we have some outliers where we have very, very strong demand and -- but we're certainly not raising prices like we were in the first half of last year.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. Second question, I think last quarter on the call, in response to my question you mentioned, if the softer demand environment continued the biggest lever you could pull is pulling back on a spec starts. And I believe Hilla made a comment that that you did in fact pulled back a little bit on the spec starts. I think spec accounts still up about 20% year over year and that's I'm sure largely a function of more entry-level mix.

So recognizing you're not giving kind of annual guidance, and we fully understand that, how would you think about the current level of spec activity -- spec starts that you're running at today? What type of annual closing volume would that roughly translate to recognizing you get close to about 8,500 homes last year and you're clearly prioritizing a pace to a large extent right now to keep the machine running.

Steve Hilton -- Chairman and Chief Executive Officer

Yes, Alan, it's just way too granular for right now. I mean, I would tell you this, our total specs at the end of the quarter were down a bit from the previous quarter. We had 2,507 specs at the end of '18 versus 2,586 the previous quarter. I can tell you we've put a hard brake on move-up specs.

We're really trying to bring down our move-up specs to about one third of our absorptions. We think that's kind of the right number. About 30% to 35% of our large sales in the move-up segment are going to be specs, so we're really trying to make sure we have that number right-sized in every one of our communities, but we're continuing to evaluate on a monthly basis, how many specs we have in each entry level community as well and making sure that we have the right quantity to be able to not hurt our sales because we know those entry-level buyers don't want to wait for a home and they want to move in quicker and they don't need to go to the design center. They're happy to accept some of the great choices that we have for them for interior finishes and so forth.

So that strategy continues to work out well, but we're very careful on how we approach the spec strategy and this is subsequently different per entry-level as it is for move-up.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

So, Alan, I think just a little bit more color. We've talked about this in another call that spec count for us in entry level is running about two times the pace that is running outside of the entry level and it's function of month of supply sales, right. So as the sales volume move up and down with the market, we're naturally regulating how many specs we have started, which is why we started between Q3 and Q4. The market's going to dictate how many specs we have, and we're not going to overbuild to a specific numbers as a function of sales.

Alan Ratner -- Zelman & Associates -- Analyst

Well, that's what I was really trying to get that Hilla is, what is that month's supply number you're targeting? Because if I look at the 2,500 specs embedded within that presumably is some expectation for what sales are going to look like over the next several months.

Steve Hilton -- Chairman and Chief Executive Officer

I can't rule it out for you, but I can tell you let's say for a spec, for entry-level community, if we're planning to sell for a month, that's been our history, our track record from the last couple of three quarters. And based upon seasonality, we probably have 16 specs for that community, a four-month supply, for a move-up community, for selling two a month, it's a longer cycle time for those homes. So, for some are two a month and one third of those are spec so it would be maybe three or four or five specs for those versus 16 for an entry-level community.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

And we're making those decisions weekly when we schedule lot of starts. We're constantly looking at our sales pace and expectations and adjusting, so we don't have a magic number we're trying to hit by the end of 2019. We're making the decisions live on the ground based on what we are seeing.

Steve Hilton -- Chairman and Chief Executive Officer

Yes, we're not trying [Inaudible] the ground to drive to a certain point. We're putting the specs on the ground based upon what the market has given us.

Alan Ratner -- Zelman & Associates -- Analyst

OK. Got it. OK. I appreciate that.

Thank you.

Operator

The next question comes from Scott Schrier of Citi. Please go ahead.

Scott Schrier -- Citi -- Analyst

Hi. Good morning. I wanted to ask a little bit about California and Colorado. Obviously, you've had significant declines in absorption rates there, do you see opportunities for demand to pick up? And I know you've talked about how your product mix is changing there.

Are rates and incentives enough to stimulate the demand? And with that in mind, do you -- are you changing how you think about whether it's your -- the pace that you open communities there, meaning is the underlying demand there still very strong as long as you get to the right product mix?

Steve Hilton -- Chairman and Chief Executive Officer

Yes, I think that's -- you're hitting the nail right on the head. I mean, a lot of our issues in California and less so in Colorado are more -- our own execution than they are the market. We have our lowest level of communities open in California than we've had a long time, and that's because it's taken us significantly longer to get our communities open. We have many communities that are more than a year delayed in California right now for a variety of different reasons.

I believe we only have 18 communities opened in the whole state of California and we have like another 18 in the queue getting to ready to open. So the new communities we're going to be opening in California are priced lower, have lower ASPs, and they're more entry-level focused. So we think that's going to help us improve our numbers in California, and I'd say it's the same for Colorado. We stopped buying new communities in Colorado quite some time, and we have quite a few communities there scheduled to open mostly focused on entry-level markets so it's really about the mix and the mix can have a -- both those markets, California and Colorado, North and Southern California, and Denver are very housing-starved.

And if you can deliver appropriately priced product to the entry-level segment of the market, I think you can do well in both of those states going forward, and that's what we're going to try to do.

Scott Schrier -- Citi -- Analyst

Got it. And my follow-up, I wanted to ask a little bit about the land spend that I know for '18, it was 85% of your newly controlled lots were going toward the entry-level. Is that more of an effort to right-size the book? And we should see more diverse land purchasing in '19? Or would you expect also say, in excess of 80% of your land acquisition in '19 to be at the entry-level also?

Steve Hilton -- Chairman and Chief Executive Officer

Well, it's both. We want to get our entry-level segment to more than 50% of our total orders and we want our -- 50% of our communities facing the entry-level segment. So, we have to continue to spend there to balance that and, as you said, right-size the book. At the same time, that's where the strongest demand is right now and for the foreseeable future.

Those people that are buying entry-level homes aren't coming out of an existing home, where they have a 3.5% to 4% mortgage and looking to move into a more expensive home with a 4.5% with 5% mortgage. So they're -- they need a home, they're starting families. They're -- they have to get their kids in school. Their decision and matrix in their mind is much different than the move-up buyer, and they are as persuaded by the [Inaudible] of the markets, so they're the strongest segment, and we're going after that.

Scott Schrier -- Citi -- Analyst

Great. Thanks for taking my questions.

Steve Hilton -- Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Carl Reichardt of BTIG. Please go ahead.

Carl Reichardt -- BTIG -- Analyst

Thanks. Good morning, guys. Just a clarification. Hilla, you talked about closings being below -- lower than you expected, which was part of the issue for the SG&A.

I read -- I think I have this right is that closings are ahead of what your guidance was and certainly what the Street had. Is that really more an issue of the communities hanging in there longer than you had anticipated and that was what drove the SG&A higher? Or is there something in the closing numbers I'm missing?

Hilla Sferruzza -- Executive Vice President and CFO

You're right, on both fronts. So No. 1, we had more communities open, I think Steve mentioned it was 32 communities were opened that we were not expecting to be opened in Q4, so that has additional burden.

Steve Hilton -- Chairman and Chief Executive Officer

Not all of them because they're less than 10. Yes.

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

Great. So, they had the burden that we weren't anticipating which is part of the reason why our SG&A is higher. Another piece of it, even though our numbers came in better than we had expected they didn't come in better than we had expected at the beginning of the year. So it takes a little while, so expect overhead reduction and to get everything done.

So we are running at a higher pace, which we've since adjusted in Q1.

Carl Reichardt -- BTIG -- Analyst

OK. That makes sense. And then on your [Inaudible] rate, about 500- basis points up, the mix shift might be part of that at least historically low and got somewhat of a higher [Inaudible] rate. Are you seeing [Inaudible] rates change at different rates between the low-end and the move-up and how much of that [Inaudible] rate was driven by mix versus, say, geographic market?

Steve Hilton -- Chairman and Chief Executive Officer

Well, it clearly is a mix shift. You're going to have higher [Inaudible] at the entry-level than you are at the move-up, more for mortgage qualification reasons. Those buyers are stretching a little bit more to qualify for a new home. With that said, in the fourth quarter, we did have a considerable number of move-up buyers got cold feet because of the gyrations in the stock market, some of the headlines and the interest rates and so forth, and they just walked away and said, "We'll be back later." So it was really both factors at play.

Carl Reichardt -- BTIG -- Analyst

OK. Great. Thanks, Steve. Thanks, guys.

Steve Hilton -- Chairman and Chief Executive Officer

Thanks.

Operator

The next question comes from Jade Rahmani of KBW. Please go ahead.

Jade Rahmani -- KBW -- Analyst

Hi. Thanks for taking the question. I was wondering if you could provide your views on M&A and if you think in the current environment there should be industry consolidation among the public players to drive scale and efficiency gains?

Steve Hilton -- Chairman and Chief Executive Officer

I think there always should be consolidation. I think there's too many of us doing the same things. That said, I'm not expecting a lot of M&A activity for a variety of reasons I'm not going to articulate right now. But I generally see more M&A when values are higher, and when builders are trading below book value.

I think it's hard to expect M&A to occur. There was quite a bit of private builder M&A last year and I expect the same for this year. Public builders buying private builders, but I think public-to-public is going to be hitting us.

Jade Rahmani -- KBW -- Analyst

Thanks for that. Just secondly on SG&A for the first quarter, what's a reasonable way to think about it, assuming that there's negative operating leverage from the lower closings that you guided toward?

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

We're not prepared to discuss SG&A. It wasn't part of our guidance and we'll give you guys a little bit more clarity on that. Obviously, on our first quarter earnings as we mentioned, we had some of right adjustments in our overheads in Q1 and we'll be prepared to talk about that on next call.

Jade Rahmani -- KBW -- Analyst

Thanks very much.

Steve Hilton -- Chairman and Chief Executive Officer

OK. Thank you.

Operator

The next question comes from Stephen Kim of Evercore ISI. Please go ahead.

Stephen Kim -- Evercore ISI -- Analyst

Yes, thanks very much, guys. And sorry for -- I had a lot of phone problems here. So, I want to just revisit the incentives comment. You've said a few things here, a lot of them seem important.

You mentioned that you did cut back on incentives in January, but last week there was a special promotion and you also said that you have a series of promotions planned in the spring selling season it sounds like. And Hilla's comments on gross margin also said that you anticipate, I think she said, increased incentives. And so putting it all together, I'm curious, overall were these promotions are regular or planned well ahead of time because you're talking about the spring selling season or a reaction to a continued sluggish environment? And was the reaction to the January promotion that you did, that's what you expected or was a little stronger than expected? And so kind of overall, are you seeing the need to maintain high levels of incentives versus a normal spring selling season or not?

Steve Hilton -- Chairman and Chief Executive Officer

The promotion that we had last weekend did a little better than we thought. And I think our mindset has maybe evolved a bit from last year that we cannot let market share get away from us. And we're not going to let brand X, Y, and Z take our buyers on price. So we're going to have to -- we're going to have to make sure that we're offering the right types of promotions and the right incentives to attract buyers to our product.

So, yes we were running a lot of promotions in the first half of last year. We were raising prices, right. So market -- the environment changed. And although the incentives have expanded a bit, the net impact hasn't been as significant because of the lower costs that we have this year.

And we're continuing to drive costs lower as we optimize our plan offering, our plan line up, and work with our trade partners and vendors to reduce costs. At the same time, the overhead leverage becomes more and more important and, we're very, very focused on that and want to keep this machine running, that has better offering with better efficiency levels.

Stephen Kim -- Evercore ISI -- Analyst

Yes, you've been really clear about that. And so it sounds kind of like the level of incentives and the promotions that you're kind of planning here, it sounds like you guys going on offense more than it is a sort of a defensive reaction to a weakening market trend. I suppose that's a fair way to summarize it?

Steve Hilton -- Chairman and Chief Executive Officer

Yes, I would say that you hit it right on the head. I mean, we're going to be very offensive over the next several months, maybe more or so than we were last year.

Stephen Kim -- Evercore ISI -- Analyst

Steve, I can't imagine you being perceived as offensive.

Steve Hilton -- Chairman and Chief Executive Officer

No, I would say like we're going to have a stronger aerial attack and we're just going to -- we're not going to be on the ground game as much as last year. So, sorry, I [Inaudible]. But I think you know what I meant.

Stephen Kim -- Evercore ISI -- Analyst

Right. The second question I had relates to your land positions. So you've made this very significant and effective pivot to target the entry level with the LiVE.NOW. and all the other things that you've been doing.

But one of the questions that we've gotten from investors has to do with some of the land positions that may be associated with your previous strategy before you made this pivot. I'm wondering whether or not there may be some risk that those kind of get orphaned on the balance sheet. So I'm wondering maybe if you could talk about what your approach is to dealing with some of these lot parcels, maybe you could size it up for us or just how you think about the game plan for the -- what you might call legacy land positions.

Steve Hilton -- Chairman and Chief Executive Officer

Price them to sell. I mean, we have I think as I said earlier, we have about 15% of our communities are 2 MU and probably a little more aggressive this year than last year to get out of them quicker because I want to turn that capital around, potentially return it to shareholders, potentially use it to buy more entry-level communities, potentially save it for a rainy day. But those -- the opportunity for those communities do increase absorptions and raise prices is not that strong. So, we need to move those assets and we're focused on that in 2019.

Stephen Kim -- Evercore ISI -- Analyst

Should we be thinking they are kind of bulk sales target? Or do you think it's more just sort of building them out and just being aggressive on price?

Steve Hilton -- Chairman and Chief Executive Officer

Probably more building them out and being more aggressive on price. I mean, there's an opportunity to sell them on a one-off basis to other builders. We're definitely going to consider that and look at that, but there's no grand strategy to move all those in bulk.

Stephen Kim -- Evercore ISI -- Analyst

Got it. OK. That's helpful. Thanks very much, guys.

Steve Hilton -- Chairman and Chief Executive Officer

Thanks.

Operator

The next question comes from Jay McCanless from Wedbush Securities. Please go ahead.

Jay McCanless -- Wedbush Securities -- Analyst

Hey, good morning. So my first question, just -- can you guys tell us what defines or what is the threshold for a community? Is it five lots left to sell or how do you all define it?

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

If we have five lots left to sell, we count it as active. During the downturn, if it was 10 lots and it wasn't moving, we would also count it as inactive we're certainly not in the same mind-frame right now, which is why communities with very, very few lots -- between 5 and 10 -- are being counted as active, some of them actually sold down to five and then had cancellations that brought them back up into the active category. That's why that 32 community count that's kind of just on the cusp is causing such a big skew in our numbers.

Steve Hilton -- Chairman and Chief Executive Officer

On the other side of that is when we open a community if we made one sale, and we have an active sales presence, it could be counted as a community even though it might not be fully running yet. Once we make sale, we count it.

Jay McCanless -- Wedbush Securities -- Analyst

So, if you back those out, you guys are essentially flat with last year's community count? And should we expect that to come down through the year? Or are you all -- do you believe you're going to be able to open up enough entry-level communities to hold it steady at roughly like a 245 number?

Steve Hilton -- Chairman and Chief Executive Officer

Well, we finished the year at two -- was it 264?

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

274.

Phillippe Lord -- Executive Vice President and Chief Operating Officer

274.

Steve Hilton -- Chairman and Chief Executive Officer

274? Again, as I said, we're not going to give really specific quarter-to-quarter guidance on that. These numbers can go up or down every quarter based upon -- sales pace has a lot to do with it, not just getting communities open, but actually how we're selling on the opening and on the closing. But I think for the year, it's going to be pretty flat to that number maybe potentially even down a bit.

Jay McCanless -- Wedbush Securities -- Analyst

And then the other question I had in terms of the incentives in the [Inaudible] stuff that you talked about, are -- do you believe that your overall customer acquisition cost has got to go up from here in order to maintain the pace? Or do you feel like the current level is driving enough volume to meet your plan?

Steve Hilton -- Chairman and Chief Executive Officer

No, I think we're getting more efficient with our marketing and marketing dollars, and we don't have -- we're not intending to spend substantively more money on marketing. And we're also not intending to increase commissions. We may pay some additional commissions on 2 MU spec homes or something to move them off the books. But our strategy hasn't changed around commissions and marketing spend.

So, I do not expect changes in that area.

Jay McCanless -- Wedbush Securities -- Analyst

Then one other quick one, of the specs that you have now, how many of that 2,000 number are move -- second move-up homes?

Steve Hilton -- Chairman and Chief Executive Officer

I don't have that number. Hilla, do you have that?

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

I don't have that number, but I can tell you that we are keeping below the units per community on entry level than we do on the first move-up and spec, 2 MU will be even lower than that, about a third. So that you can kind of do the mental math and get to those numbers.

Jay McCanless -- Wedbush Securities -- Analyst

Got it. Thank you.

Steve Hilton -- Chairman and Chief Executive Officer

Thank you.

Operator

Mr. Hilton, we're at the end of our time. Should I have one -- should I take one more question?

Steve Hilton -- Chairman and Chief Executive Officer

I think we've got one more in the queue. Let's take that and then I will wrap it up.

Operator

The next question is from Alex Barron of Housing Research Center. Please go ahead.

Steve Hilton -- Chairman and Chief Executive Officer

Save the best for last, Alex.

Alex Barron -- Housing Research Center -- Analyst

Yes, sounds good, Steve. Thanks. I was just curious, I guess about your thoughts. So, you're saying you're not going to let other guys take market share and other guys say they are willing to sacrifice margins to outsell everybody.

So I'm just trying to square those two comments, how competitive are you willing to be comment in terms of -- are you also willing to take price margins just to keep up with those guys?

Steve Hilton -- Chairman and Chief Executive Officer

We'll be more competitive than we have been in the past. let me say that. And we will sacrifice some margin, but as we shift to more entry level, we think we're able to close the cost gap with them. We're -- our costs historically have probably been a wider than they should be and I think as we rationalize our product, our cost gap is -- hopefully is narrowing.

And then combine that with the leverage from our overhead by pushing through higher volumes we expect that the impact on margin degradation is going to be not as much as people might think. So, we just can't sit here and say we're going to wait for the storm to pass because it's not going to pass because they're very, very focused on driving volume, and we're going to have to adapt and move more to that model if you want to be successful.

Alex Barron -- Housing Research Center -- Analyst

Got it. And as far as the tax rate that was pretty unusually low this quarter. So, what can we -- I mean, I'm not sure if I missed your comment on what drove that, but what can we expect for next year?

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

So, we covered it a little bit. The reason why that was still low in the quarter, a little bit of it was DTA revaluation which is just something that happens at the end of the year, but a big chunk of it was -- we actually went back and [Inaudible] for energy efficiency targets, all of the homes that closed in '15, '16, and '17. We were able to capture an additional pool of home. There's not been any action yet in Washington to approve the energy tax credit for 2018 or any subsequent year.

But, obviously with the government shutdown, that wasn't the No. 1 priority. We're still very actively pursuing it. If that comes to fruition, we'll be able to see some savings again in '19.

If it doesn't, we'll continue to push on some of the cooler tones for additional credits, but we'll start to shift closer to the 24%, 25% blended tax rate.

Alex Barron -- Housing Research Center -- Analyst

Got it. OK. Well, best of luck. Thanks.

Steve Hilton -- Chairman and Chief Executive Officer

Thanks, Alex, and thank you, everybody, for your participation in our fourth-quarter 2018 earnings call. That's going to be wrap it up and we'll look forward to talking to you again at the end of the first quarter. Have a great day.

Operator

[Operator signoff]

Duration: 71 minutes

Call Participants:

Brent Anderson -- Vice President of Investor Relations

Steven Hilton -- Chairman and Chief Executive Officer

Phillippe Lord -- Chief Operating Officer and Executive Vice President

Hilla Sferruzza -- Chief Financial Officer, Executive Vice President

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Stephen East -- Wells Fargo -- Analyst

Michael Rehaut -- J.P. Morgan -- Analyst

Susan Maklari -- Credit Suisse -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Scott Schrier -- Citi -- Analyst

Carl Reichardt -- BTIG -- Analyst

Jade Rahmani -- KBW -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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