Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Taylor Morrison Home Corp  (NYSE:TMHC)
Q4 2018 Earnings Conference Call
Feb. 13, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning, and welcome to Taylor Morrison's Fourth Quarter 2018 Earnings Conference Call. Currently all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference call is being recorded.

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

Jason Lenderman -- Vice President of 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 will 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.

Sheryl Palmer -- Chairman and Chief Executive Officer

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 appear 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 US just had its 100th straight months of positive job creation. Incomes also continue to grow and many of the major markets in the US continue to have limited housing supply just as the industry continues to be under-built 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 provide 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 team 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 than 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 four 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 toward 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 ensuring 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.

Dave Cone -- Executive Vice President and Chief Financial Officer

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 cost 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 margin by about 13 basis points or $5 million. This was an improvement from our purchase price allocation guidance last quarter as we refined our methodology during Q4. The 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 closeout 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 have 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 two parts, with one 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 paydown.

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.

Sheryl Palmer -- Chairman and Chief Executive Officer

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 among the Gen Xers and boomers.

The trend that we have seen with the Taylor Morrison customers appear 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 in line 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 three 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 three to four 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 continues 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 Home Builder 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 home builder to win it four 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 our 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 of top leaders from 680 companies in 30 countries. When isolating the survey results within our own industry, Taylor Morrison ranked number two in both people management and quality of products and services, while earning the number three spot in innovation, use of corporate 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 defines 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.

Questions and Answers:

Operator

Thank you. (Operator Instructions)

Our first question comes from the line of Scott Schrier of Citi. Your line is open.

Scott Schrier -- Citigroup -- Analyst

Hi. Good morning. Thanks for taking my question.

Sheryl Palmer -- Chairman and Chief Executive Officer

You bet (ph).

Scott Schrier -- Citigroup -- Analyst

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 closeout communities. I'm curious on the PPA accounting as a benefit, does that imply that certain assets were written down or is it something more mechanical? So just curious how we're looking at land from that perspective.

Dave Cone -- Executive Vice President and Chief Financial Officer

Sure. I'll start with the impairment one. First, I guess, it's a good question. To 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 toward 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.

Scott Schrier -- Citigroup -- Analyst

Got it. And then, more broadly speaking, some builders 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 point, to maximize your returns.

Sheryl Palmer -- Chairman and Chief Executive Officer

Sure. You bet, Scott. You know I think it's very difficult to declare a single portfolio strategy. But if I had to, the bias would be 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 on line 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 and 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.

Scott Schrier -- Citigroup -- Analyst

Great. Thanks for that. Good luck.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thanks, Scott.

Operator

Thank you. Our next question is from the line of Stephen East of Wells Fargo. Your line is open.

Stephen East -- Wells Fargo Securities -- Analyst

Thank you, and good morning, Sheryl and Dave.

Sheryl Palmer -- Chairman and Chief Executive Officer

Good morning.

Stephen East -- Wells Fargo Securities -- Analyst

On the order side, you talked about the nice pickup that you've seen in January and February. A 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 are performing, move-up, entry-level, et cetera, on that, and I'll stop there.

Sheryl Palmer -- Chairman and Chief Executive Officer

Yeah, you bet, Steve. If I think about the end of the year, as I mentioned in my prepared comments, October -- the fourth quarter was tough. October was barely down. November is really where we saw our greatest dip, and then December was slightly up. What we've seen since then, probably mid-January, I would say, since the third 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 you almost have to peel back the onion market by market because -- 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.

Stephen East -- Wells Fargo Securities -- Analyst

Yeah, fair enough. Fair enough. Yeah, 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, may be Dave, where the synergy buckets are occurring?

Dave Cone -- Executive Vice President and Chief Financial Officer

Yeah, you bet, Stephen. So we previously guided to the $30 million. We're bringing that up to -- bringing it up by $10 million to $40 million now. And that original breakdown was about two-thirds in overhead and then the other third 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 eat this up a little bit more in the coming quarters.

Stephen East -- Wells Fargo Securities -- Analyst

All right. Thanks a lot.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Mike Dahl of RBC Capital Markets. Your line is open.

Michael Dahl -- RBC Capital Markets -- Analyst

Good morning. Thanks for taking my questions.

Sheryl Palmer -- Chairman and Chief Executive Officer

You bet.

Michael Dahl -- RBC Capital Markets -- Analyst

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?

Sheryl Palmer -- Chairman and Chief Executive Officer

So let me try to give you some color, Scott (ph). 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 would 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 parcel 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 four, five 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.

Michael Dahl -- RBC Capital Markets -- Analyst

Got it. Okay. Thanks for that color. And then, my follow-up question just around the incentives, and it sounds like there has 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 two different things. One is, can you help us understand the magnitude of margin impact, either on dollar or 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?

Sheryl Palmer -- Chairman and Chief Executive Officer

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.

Michael Dahl -- RBC Capital Markets -- Analyst

Got it. Okay. Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Alan Ratner of Zelman & Associates. Your line is open.

Alan Ratner -- Zelman & Associates -- Analyst

Hey guys, good morning. And Sheryl, congrats on those accolades to you. You rattled off (ph) there, very impressive, during the quarter there.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thanks, Alan.

Alan Ratner -- Zelman & Associates -- Analyst

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's 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 looks like for the quarter into January for the Company?

Dave Cone -- Executive Vice President and Chief Financial Officer

Yeah, the can rate for the quarter was 20% for the total Company.

Sheryl Palmer -- Chairman and Chief Executive Officer

And last year same quarter was 13.5%. So there's my 50% up. But when you put units to that, which isn't hard to do, Alan, that really generates my comments around gross sales versus net sales.

Alan Ratner -- Zelman & Associates -- Analyst

So that gets me, I'm looking at gross up -- gross orders up probably by 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?

Sheryl Palmer -- Chairman and Chief Executive Officer

Yeah, I mean the cans are slightly down, which is a 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 gen more contracts. So I think the days of our average can rate, 10% to 12%, might tick up because I think that's consistent with this buyer group. You just -- you write more deals to get them to stick. But I think in general, yeah, that's about right.

Alan Ratner -- Zelman & Associates -- Analyst

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. It 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?

Sheryl Palmer -- Chairman and Chief Executive Officer

Yeah, so I think it's tailored a couple of stories, right? Some of it unfortunately will be the reduction in sales in 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, 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, 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.

Alan Ratner -- Zelman & Associates -- Analyst

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, six 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 six weeks of the quarter?

Sheryl Palmer -- Chairman and Chief Executive Officer

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 think you've 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. In some markets, we're a little more aggressive and some we've been able to pull back, and I would expect that balanced approach is what you're seeing. But I do think there is a bias across the sector of -- as 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 what dragged 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.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. Thanks for that. Good luck.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Nishu Sood of Deutsche Bank. Your line is open.

Nishu Sood -- Deutsche Bank -- Analyst

Thank you. 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?

Dave Cone -- Executive Vice President and Chief Financial Officer

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'd want to point out two things. One, the PPA does provide a benefit, but at the same time, the legacy AV margins have kind of been in that mid-teens, mid-to-high teens, so there is 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 are guiding to in Q1, it's at mid-17% on a 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 that kind of consistent run rate into Q1. And then as we move forward, there -- we'll readdress that next quarter.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. Okay. So a similar kind of factor amount in 1Q compared to 4Q?

Dave Cone -- Executive Vice President and Chief Financial Officer

Yeah, it could be. It's obviously the level of closings that come through that business that ultimately will drive that amount relative to the penetration to the legacy TM side. But I'd...

Nishu Sood -- Deutsche Bank -- Analyst

Got it. Got it. Okay.

Dave Cone -- Executive Vice President and Chief Financial Officer

I'd hold the run rate for now.

Nishu Sood -- Deutsche Bank -- Analyst

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, if I heard that correctly. 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 kind of draw down the land supply?

Dave Cone -- Executive Vice President and Chief Financial Officer

Well, I think we'd have to look out -- we're trying to balance somewhere around that five years of supply. I think it's going to depend somewhat obviously on the order environment. We -- at times, we'll 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've 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're pretty aggressive on share repurchase. In fact, we kind of went through when we bought back all the shares we issued in the 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.

Sheryl Palmer -- Chairman and Chief Executive Officer

And I think that's spot on. The only thing I'd add to that, Nishu, is, at some level, and Dave said it well, that we tend to operate contrarian. We've seen a lot of people exit the market which does create opportunity. Then we've also seen some land sellers start to get a little religion (ph) about what's happened. So we never leave the land market, but we'll continue to be very selective. And generally, what we do in 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 -- 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...

Dave Cone -- Executive Vice President and Chief Financial Officer

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

Sheryl Palmer -- Chairman and Chief Executive Officer

So we're in a very good place. We can be selective.

Nishu Sood -- Deutsche Bank -- Analyst

Got it. Okay. Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question is from the line of Carl Reichardt of BTIG. Your line is open.

Carl Reichardt -- BTIG -- Analyst

Thanks. Good morning.

Sheryl Palmer -- Chairman and Chief Executive Officer

Good morning.

Carl Reichardt -- BTIG -- Analyst

Sheryl and Dave you talked about -- 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 a 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?

Dave Cone -- Executive Vice President and Chief Financial Officer

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 a 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're going to -- we expect that to kind of even out as we get through the first half of 2019. But we typically say, we're -- four to five 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 at about 6.3 right now. That's probably somewhere where we would expect to be on a go-forward basis.

Sheryl Palmer -- Chairman and Chief Executive Officer

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 four to five, this could easily be five to seven, 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 specs philosophy and selling those early in the process.

Carl Reichardt -- BTIG -- Analyst

Okay great. I appreciate that. But the deal, it's -- were -- 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 they're -- I think they're sort of most viscerally seeing things change. How are they responding in terms of pricing? How is the availability, particularly with framing? Thanks.

Dave Cone -- Executive Vice President and Chief Financial Officer

Yeah, I would 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 happening with lumber and OSB. Obviously, still some risks around tariffs, but something like labor is something we watch pretty closely.

Sheryl Palmer -- Chairman and Chief Executive Officer

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-day 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. In other places like Florida, we can't get roofers. And so this is kind of what we do each and every day. Sometime 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.

Carl Reichardt -- BTIG -- Analyst

Okay. Thanks, Sheryl.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Your next question is from the line of Jay McCanless of Wedbush. Your line is open.

Jay McCanless -- Wedbush Securities -- Analyst

Hey, good morning everyone. So the first question I had on the East, very good order performance there. But since your footprint this year with active adult (inaudible) added 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?

Sheryl Palmer -- Chairman and Chief Executive Officer

Yeah, 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 Bay when people are using RSUs and options to buy houses. But as -- 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 difference is the 50 -- TM 55 business has generally a little higher price point than the AV, but they performed in generally the same, and that's where 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.

Jay McCanless -- Wedbush Securities -- Analyst

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 Home inventory homes?

Dave Cone -- Executive Vice President and Chief Financial Officer

As Sheryl said, we've kind of moved to the combined business. I would say, it's just more proportionate though to the relative size of AV.

Sheryl Palmer -- Chairman and Chief Executive Officer

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 won't say it's meaningful.

Jay McCanless -- Wedbush Securities -- Analyst

Okay, great. Thanks for taking my questions.

Sheryl Palmer -- Chairman and Chief Executive Officer

You bet.

Operator

Thank you. Our next question is from the line of Matthew Bouley of Barclays. Your line is open.

Matthew Bouley -- Barclays -- Analyst

Hi. Thank you for taking my questions. I wanted to follow up on the incentive discussion, and just thinking historically, Sheryl, when you think about prior periods where there has 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 it might take a bit longer to work through? Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Yeah, it's a really good question, Matthew, because -- is there a norm from past cycles I can think, you know, the dark days, and those incentives took years. And then I can think some of these markets bumps we've seen over the last five, six 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'd 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 as the market improves.

If I think about Austin, where we also had what I'd call a mini-cycle about three 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.

Matthew Bouley -- Barclays -- Analyst

Okay. That's really helpful color. Thank you for that. And then, I just wanted to ask quickly on the community count, just beyond the first quarter guidance, is it possible to elaborate at all, at least directionally, on your community growth plans in 2019 and I guess regionally how that might be weighted? Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Yeah, 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 in 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 communities opening and then closeouts toward 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.

Matthew Bouley -- Barclays -- Analyst

Okay. Appreciate the detail. Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Rehaut of JP Morgan. Your line is open.

Maggie Wellborn -- JP Morgan -- Analyst

Hi. This is actually Maggie Wellborn (ph) on for Michael. I just wanted to quickly follow up on an early question. I was wondering how has the improvement in January and at the beginning of February that you talked about compared to normal seasonality?

Sheryl Palmer -- Chairman and Chief Executive Officer

So you would normally expect -- we've always said in this business that sales really start coming after the Super Bowl. And I will 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. We have some really tough comps we're working against. 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 six to eight weeks.

Maggie Wellborn -- JP Morgan -- Analyst

Okay, great. Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

You bet.

Operator

Thank you. And our next question is from the line of Alex Barron of Housing Research. Your line is open.

Alex Barron -- Housing Research Center -- Analyst

Yeah. Hi guys. 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?

Dave Cone -- Executive Vice President and Chief Financial Officer

Yeah, we hit that early 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 were just moving to closeout 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 -- 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.

Sheryl Palmer -- Chairman and Chief Executive Officer

And that's in our central region.

Dave Cone -- Executive Vice President and Chief Financial Officer

Yeah.

Alex Barron -- Housing Research Center -- Analyst

Okay. Was it like weather-related or it was more like defects or what?

Sheryl Palmer -- Chairman and Chief Executive Officer

There is a technical (inaudible) -- it's pretty technical that would take a long time to walk through, but we can walk you through it in our after call.

Alex Barron -- Housing Research Center -- Analyst

Okay, great. Thanks.

Sheryl Palmer -- Chairman and Chief Executive Officer

You bet.

Operator

Thank you. And this does conclude our Q&A session. I would like to turn the call back over to Sheryl for any closing remarks.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you for joining us today. I appreciate you spending this morning with us. I wish you a great week and we'll talk to you next quarter.

Operator

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.

Duration: 62 minutes

Call participants:

Jason Lenderman -- Vice President of Investor Relations and Treasury

Sheryl Palmer -- Chairman and Chief Executive Officer

Dave Cone -- Executive Vice President and Chief Financial Officer

Scott Schrier -- Citigroup -- Analyst

Stephen East -- Wells Fargo Securities -- Analyst

Michael Dahl -- RBC Capital Markets -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Carl Reichardt -- BTIG -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Matthew Bouley -- Barclays -- Analyst

Maggie Wellborn -- JP Morgan -- Analyst

Alex Barron -- Housing Research Center -- Analyst

More TMHC analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.