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William Lyon Homes  (NYSE:WLH)
Q4 2018 Earnings Conference Call
Feb. 14, 2019, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year End 2018 William Lyon Homes Earnings Conference Call. My name is Carmen and I will be your operator today. At this time, all participants are in a listen-only mode.

(Operator Instructions) Later, we will have a question-and-answer session.

(Operator Instructions) This call is being recorded and will be available for replay through February 21, 2019, starting this afternoon approximately one hour after the completion of this call.

Now I would like turn the call over to Mr. Larry Clark, Investor Relations. Please go ahead, Mr.Clark.

Larry Clark -- Head of Investor Relations

Thank you, Carmen. Good morning and thank you for joining us today to discuss William Lyon Homes financial results for the three months and full-year ended December 31, 2018. By now, you should have received a copy of today's press release, if not it's available on the company's website.

Press release also includes a reconciliation of non-GAAP financial measures used therein. In addition, we're including an accompanying slide presentation that you can refer to during the call. And also access these slides in the Investor Relations section of the website.

Before we continue, please take a moment to read the company's notice regarding forward-looking statements, which is shown in slide one of the presentation and included in the press release. As explained in the notice, this conference call contains forward-looking statements, including statements concerning future financial and operational performance. Actual results may differ materially from those projected in the forward-looking statements and the company does not undertake any obligation to update them.

For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the company's SEC filings. With us today from Management are Bill H. Lyon, Executive Chairman and Chairman of the Board; Matthew Zaist, President and Chief Executive Officer; and Colin Severn, Senior Vice President and Chief Financial Officer.

Now I'd like to turn the call over to Bill Lyon.

William H. Lyon -- Executive Chairman of the Board

Thank you, Larry. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. I'm extremely proud of the results our team delivered, making 2018 the best year in the 62-year history of our Company. Our home sales revenue for 2018 was $2.1 billion, up 16% year-over-year, surpassing the $2 billion mark for the first time in the Company's history.

Deliveries were up 29% year-over-year to 4,186 and net new home orders grew by 24% to 4,133 both company records. Our net income for the year was $91.6 million, up 90% year-over-year. Adjusted net income increased 12% year-over-year to $95.5 million. Overall, our results further accreted the book value of our company, ending the year with the total equity of over $1 billion and total William Lyon Homes stockholders' equity of approximately $863 million, equating to an overall book value per share, as of December 31, 2018 of $23.03 and tangible book value per share of $19.54.

All of that said, we along with the rest of the homebuilding industry, experienced a challenging environment in the fourth quarter of 2018. While overall housing supply dynamics remain favorable, in October and November 2018, we experienced homebuyer demand levels, that were less than what we had planned. As mortgage interest rates increased and consumer confidence waned, along with increased stock market volatility. As a result, we sold and closed fewer spec homes in the fourth quarter than we had expected. And we also experienced a slightly higher cancellation rate in certain of our markets than in recent years, which led us to fall short of our delivery and revenue expectations for the quarter.

I'm proud of our operating teams staying focused during this challenging period and delivering what we could to close out a record year. During December and into January, we've seen a bit of a rebound in the market conditions, and we're cautiously optimistic that the spring selling season will put us in position to execute on making 2019 another year of growth for William Lyon Homes.

With that I will now turn the call over to Matt, for additional commentary on our fourth quarter and full-year operations. Matt?

Matthew R. Zaist -- President, Chief Executive Officer,

Thanks, Bill. First, I'd like to thank all members of the William Lyon Homes team for their contributions toward our many accomplishments in 2018, including record breaking revenue deliveries and orders. Early in the year, we completed a significant acquisition with the RSI transaction and we've done a solid job integrating their operations from both the customer facing and internal personnel perspective. A lower price points and geographic diversification, associated with the acquisition gives us additional exposure to the first-time home buyer segment and expanded our footprint into one of the very best new home markets in the country in Central Texas.

We've quickly grown into the Number six builder in Austin, and the increased Southern California presence has bolted us into a top five builder in the Inland Empire. Size and scale have helped us with our subcontractor relationships and enabled us to build a national purchasing team, which is helping us realize cost efficiencies across the William Lyon Homes' platform. Additionally, we generated significant cash flow in the fourth quarter, enabling the Company to repay $187 million of principal amount of debt.

As Bill mentioned, ultimately, we sold and closed fewer spec homes in the fourth quarter than we had previously anticipated, which created lower closing in revenue numbers, than we had recently forecasted. On a positive note, gross margins were at the high end of our expectations, sales and marketing percentage was spot on and G&A dollars, on an absolute basis, we're in-line, although the percentage was off due to decreased leverage on lower revenue.

While the disruption we experienced in October and November caused us to miss our internal forecasts. We are incrementally encouraged by December's rebound in sales activity, as well as what appears to be a more normalized start to 2019. We saw a meaningful uptick in traffic and sales activity in December, which demonstrated significant sequential improvement with an absorption pace up 21% over November. We continue to see sequential improvement into January. Overall, December and January were more in-line with what our historical sales rates have been in those months over the past several years.

If traditional trends hold true in terms of spring selling season evolution, we would expect to see some sequential acceleration moving into February, March and April. Although, we are taking a bit more cautious view this year until the spring selling season plays out. While we felt the moderation in demand, across our entire footprint in Q4, which affected our full-year pull through. The Pacific Northwest and the Bay Area were really the poster children for outpaced home price appreciation during the prior 24 months, followed by a pullback in demand in the back half of 2018.

We implemented some strategies toward the end of the year to ensure we remain competitively priced in those markets, while also keeping an eye on protecting our backlog. As interest rates abated in December and the stock market calmed down, we saw a return of perspective buyers in Seattle and the Bay Area in a more normalized way than the preceding months.

Looking ahead and as highlighted on last quarter's call, we feel we have attractively priced new communities opening in Seattle and the Bay Area that we expect to drive improved performance. For example, our SoHay Master Plan in the Bay Area, which we expect to open for sales in the second quarter, has grown its interest list to over 2000 prospective buyers in the last two months, with anticipated prices starting in the high 300,000s through the high 600,000s in core Alameda County.

We continue to be pleased with the performance of our Central Texas operations, which during the fourth quarter experienced a higher than company average absorption rate of 2.5 homes per community per month. In contrast to our other operating divisions, October actually represented the best absorbing month for Central Texas during the fourth quarter and represented the strongest month of sales in the nine months following our acquisition.

Our ASP in Central Texas for homes closed during the quarter, was an affordable $273,000 as we continue to focus on the entry level buyer in this important growth market for us. Similar to Central Texas, our Colorado and Arizona divisions continue to meet our expectations and see good growth with both divisions absorbing at levels above the company average in the fourth quarter and continuing strong performance into 2019. In Colorado, our entry-level product absorbed in a monthly pace of 3.6 sales per community during the fourth quarter and overall sales pace was 2.3 sales per community, up 10% from last year's fourth quarter.

Our operating team did a nice job of delivering us an ambitious growth plans for the year, increasing deliveries by over 120% to 531 units. Our Arizona division remains the best absorbing division in the company, with a rate of 5.1 sales per community per month in the fourth quarter, anchored by the continued success of our Meridian master plan, with four active selling market rate communities, plus three recently launched Ovation active adult communities.

In Southern California, one of our biggest challenges has been dealing with an increasing cancellation rates in the Inland Empire. This remains a focal point for us, as we've seen fairly solid demand and sales activity on a gross basis. Coastally, our Ovation active adult project in Orange County is one of the best performing projects in the company, without sized absorption pace and gross margins. Our focus in the Southern California markets continues to be operate attainable housing at price points at or below the market medians.

Looking ahead approximately 70% of our future lot position in Southern California consists of product targeted to the entry level or active adult buyer. We are particularly excited about the upcoming opening of our Novel Park master plan community in Orange County. As discussed on last quarter's call, where we currently have an interest list exceeding 4,500 prospective buyers, with an anticipated sales opening early in the second quarter.

I'd say the markets that we are watching the closest right now are Portland and Las Vegas. Portland remains a bit softer and we have not seen the same rebound as we've seen in Seattle. Our entry-level product in Portland continues to absorb well during the fourth quarter and we remain focused on mitigating, recent home price appreciation by introducing more attainable higher density products. In Nevada, our team achieved operating results for the full year that demonstrated substantial year-over-year growth with deliveries and orders up 31% and 22% respectively over 2017.

But our sales activity during the fourth quarter underperformed our expectations. Looking companywide from a home segment perspective our active adult entry-level products continue to represent the fastest absorbing segments with a monthly sales rate of 3.0 and 2.5 sales per community, respectively during the fourth quarter, both outpacing the company average. Roughly two-third's fourth quarter closings and our lots owned and controlled reflect these two segments.

Our sales activity drove backlog dollars of approximately $479 million and backlog units of 1,041 as of December 31st, up 11% and 27% respectively over the prior year end and representing the highest year-end backlog figures for the company in over 13 years. Our backlog conversion rate for the quarter was 82%. Our lower than expected backlog conversion rate for the quarter was impacted by the market factors previously discussed, as well as a very market-specific issues, including a lack of timely responsiveness on utility tie-ins from PG&E post the camp fire, which impacted our Q4 closings in Northern California.

After PG&E's recent bankruptcy filing and continues to be an area of focus for us, as we think about the timing of our new home community openings and deliveries in the Bay Area this year. Our average community count for the fourth quarter was 117 up from the 80 average communities during the fourth quarter of 2017. It was primarily driven by the addition of our communities in Texas and our growth in our Southern California marketplace. We expect community count for the first quarter to be relatively flat sequentially and to grow to approximately 125 communities by the middle of the year.

For a discussion on our financial results, I'll turn the call over to Colin before wrapping up with some commentary on our outlook for 2019.

Colin T. Severn -- Senior Vice President and Chief Financial Officer

Thank you, Matt. Total homebuilding revenue for the fourth quarter of 2018 was $657 million, as compared to $623 million in the year ago period, an increase of 5%. The increase in home sales revenue was primarily due to a 24% increase in the number of homes delivered partially offset by a 15% decline in ASP.

Our ASPs trended down in 2018, due to our increased percentage of entry-level units as well as the impact of the contribution from our Central Texas operations with the lowest ASPs in the company. Overall, our average sales price for homes closed during the fourth quarter was approximately $501,000. ASP of homes in backlog as of the end of the fourth quarter was approximately $460,000, down 13% from one year ago and moderately lower than the ASP of homes closed during the quarter.

Again this is being driven by our focus on the entry level buyer, on communities with lower price points relative to the competition and the inclusion of our Central Texas division this year. During the fourth quarter, our homebuilding gross profit increased to $123 million, up 5% compared to the fourth quarter of 2017 and our adjusted homebuilding gross profit also increased 5% to $154 million. GAAP gross margins for the fourth quarter were 18.8%, the highest of any quarter during the year, compared to 18.2% in the third quarter and 18.9% in the year ago period. Our adjusted homebuilding gross margin percentage was 23.4% during the fourth as compared to 23% in the third quarter and 23.5% in the fourth quarter of 2017. Our sales and marketing expense for the quarter was 5.2% of homebuilding revenue, as compared to 4.5% in the year ago quarter. The increase is primarily driven by the change in accounting rules, requiring companies to record certain selling costs that were previously recorded as cost of sales to sales and marketing expense, as well as an increase in advertising and outside broker costs.

General and administrative expenses were 5.5% of homebuilding revenue compared to 4.7% in the fourth quarter of 2017. These combined for a total SG&A expense of 10.7% for the quarter compared to 9.2% in the year ago period that slightly improved from 11% in the third quarter. For the full year, the total SG&A expense was 11.2% of homebuilding revenues. Income from our unconsolidated mortgage joint ventures was $1.1 million up from $0.5 million in the third quarter and $1 million in the fourth quarter of 2017.

We anticipate this year having a wholly owned suite of financial services and expect our title (ph) agency to write its first contracts in the second quarter and we expect to be in a position to rollout wholly owned mortgage services beginning in the back half of the year. Pre-tax income for the quarter was $54.5 million, down from $62.2 million in the year ago quarter.

Adjusted EBITDA was approximately $80 million. Our provision for income taxes during the fourth quarter was $11 million for an effective tax rate of approximately 20% which was also our effective tax rate for the full year. We are expecting an effect -- effective tax rate for the first quarter of 2019 of approximately 20%.

Income attributable to noncontrolling interest was $9.2 million during the quarter, up from $5 million in the year-ago period, and driven by a higher number of deliveries from certain joint venture communities in the quarter than in the prior year. As discussed previously, this metric is extremely difficult to predict, translating project-level cash flows and IRR based hurdles into accounting impact.

Net income available to common stockholders during the fourth quarter was $34.3 million or $0.89 per diluted share based on $38.6 million fully diluted shares. Excluding certain non-recurring items, adjusted net income for the quarter was $35.1 million or $0.91 per diluted share. For the fourth quarter of 2018, our total land spend including acquisition and horizontal spend, was approximately $104 million.

As of the end of the year, our total lot count of owned and controlled lots was 29,541 which was comprised of 81% entry-level and first-time move-up product a 9% of active adult product. Auctioned lots accounted for 40% of our total lot inventory, up from 24% at the end of last year and consistent with our year-end goals. We intend to take a more conservative approach on land spend this year, as we generate significant cash and remain focused on improving our balance sheet.

As is typical, we would expect cash flow generation to be more significant in the back half of the year. We intend to drive balance sheet improvement through accretion of earnings, as well as reduction in principle amount of our indebtedness and remain focused on our long-term leverage goals for 2020. Now turning to our balance sheet. We ended the quarter with $2.6 billion in real estate inventories, $2.9 billion in total assets and total equity of $1 billion.

We entered 2019 with total liquidity of approximately $345 million including our cash balance and the availability under our revolving credit facility. Our total debt-to-book capitalization was 56.6%, our net debt-to-net book capitalization was 55.9% at year-end. While we ended the year, a slightly higher debt-to-cap ratio than what it was at the end of 2017. Our leverage has come down from the 60.4%, level at the end of the first quarter, right after we closed the RSI acquisition. We anticipate continuing to drive leverage down over the course of the next two years.

Now, I'll turn it back to Matt.

Matthew R. Zaist -- President, Chief Executive Officer,

Thanks, Colin. Before we open the call to your questions, I'd like to provide some additional information regarding our near-term outlook. We are looking at 2019 from a cautiously optimistic perspective with a goal of maintaining or growing our market share in all of our local markets. The spring selling season will determine the degree to which we are able to grow, should also give us the data points we need to determine what our revenue and demand levers are going to be for the full year.

We expect our deliveries, gross margin and SG&A cadence to be similar to prior years, where we typically see the lowest deliveries along with the lowest gross margins and highest SG&A percentage in the first quarter with all metrics improving as we move throughout the balance of the year.

For the first quarter of 2019, we are expecting approximately 125 basis points of year-over-year compression and GAAP gross margins. The expected decline in Q1 margins year-over-year is based on the increased incentives that were necessary to make sales in the fourth quarter of 2018, as well as some geographic mix differential. Positively, as we look at January and February sales and in particular gross margin in backlog due to close in the second quarter, we are seeing anywhere from 100 basis points and 150 basis points of improvement in margin performance from expected Q1 margins, as a result of lower incentives year-to-date.

We saw a lot of sales to make and we need to see over the next few months play out, but it's an encouraging sign as we build momentum in the spring selling season. Other expected delivery metrics for Q1 closings include an expected backlog conversion rate of 82% to 86% and expected average sales price on closed homes of approximately $470,000 expected SG&A percentage of 13% and an expected income attributable to non-controlling interest of approximately $4 million.

I would now like to open up the call to your questions. Operator, we are ready for the first question.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question is from Alan Ratner with Zelman and Associates. Your line is open.

Alan Ratner -- Zelman and Associates -- Analyst

Hey guys, good afternoon. Very nice job and a tough quarter there. Matt -- just on the January commentary, I was hopeful that you might be able to put some numbers behind that, for us, it sounds like you pulled back on incentives quite a bit based on the margins. So how should we think about maybe on a year-over-year standpoint, how January orders looked.

Matthew R. Zaist -- President, Chief Executive Officer,

Well, I think January orders kind of would tell you to look at is-- kind of look at our little bit more of a historical rate of sales on January orders. Last January, we saw a monthly absorption rate of 4%, which I think, any of the preceding three years or -- three years or four years, we were typically somewhere in the mid-twos, from an absorption rate per community basis.

So, January sales down year-over-year, but seeing sequential improvement from December relative to absorption rate and both gross and net sales, up from December. So it just feels more like a normalized and more historical rate of sales and in last year really feels more like an outlier from a demand perspective.

Alan Ratner -- Zelman and Associates -- Analyst

Yeah, that's helpful. So something in the mid-twos on absorption pace, that is the way to -- to think about where you're kind of running at right now.

Matthew R. Zaist -- President, Chief Executive Officer,

And I said, we typically expect under normal seasonal cadence to see incremental improvement in absorption rates in February, March and then into April.

Alan Ratner -- Zelman and Associates -- Analyst

Okay, perfect. That's helpful. Second question, it wasn't a big number, but I think, it was at least the first charge you've flagged over the cycle the 2 million of -- I guess option abandonments you took in the quarter. I was curious, if you can give us a little bit more background on that and just kind of thinking, about your land portfolio in general, I think, one of the concerns the market seems to be having with your stock trading below book value is, you guys were aggressive buying land over the last couple of years and obviously RSI factors into that as well.

So how does the current thinking there whether its option deals that are or the there others that are on the verge of potentially being walked away from or owned deals that you're concerned about given the changes in the market that-- that might be on the books overvalued at this point? Can you give us a little bit more insight there?

Matthew R. Zaist -- President, Chief Executive Officer,

I think you always look at deals that you've got out there and you look Alan from the standpoint of product type, buyer segment type and underlying fundamentals and economics. The project that we walked away from was one up in the Bay Area that candidly was more focused on move-up oriented product and one that didn't really set our product segment profile and we had a seller that wasn't interested in renegotiating price and we just felt like it was a prudent thing for us to do. That is something that periodically happens, I think, as it relates to our land book, I think, we like our -- land book. I think, some pretty good gross margins last year and certainly gross margin improvement last year, while we put some incremental incentives into the marketplace to make Q4 sales, as I mentioned. And I think we're seeing some pretty good response so far this year and seeing margins in backlog for subsequent quarters looking stronger.

So I think, we feel pretty darn good about our book and like our assets, like our product mix. And I think, we don't foresee anything on the future, that would be an issue.

Alan Ratner -- Zelman and Associates -- Analyst

Right. I appreciate that. Thanks a lot.

Operator

Thank you. And our next question is from Michael Rehaut with JPMorgan. Your line is open.

Elad Elie Hillman -- JPMorgan -- Analyst

Hi, this is Elad on for Mike. I had a question, just a little bit on the incentive trends during the quarter, month to month and when do you had to how much of the December improvement was due to some of the incentives that you implemented. Thanks.

Matthew R. Zaist -- President, Chief Executive Officer,

Elad, it's Matt. Look, if sales slow down below our expectations and obviously, we're managing our business

business on a community-by-community basis, our sales teams are doing their competitive market analysis, which look at -- what's going on the resale market, as well as the new home competitive landscape. And we saw the implementation of some increased incentives in you know, I will call it the September, October, November timeframe.

The third quarter incentives, as a percentage of revenue and closings was about 3%, which was up about 100 basis points over Q3, You know, we're seeing again some year-over-year margin compression in Q1, which would be as a result of increasing incentives. But we've tightened that up, as I mentioned by a good 100 to 150 basis points as we turn the calendar year and continue to see, I think, it relatively historically normalized rate of sales thus far.

So, look, I think, it's just -- it's part of what you have to do and we obviously have an overall pace that we'd like to try to maintain and we've got to make sure that our houses are competitively priced and we're not immune to what other builders might be doing that are adjacent to us or what the resale market is doing but the mentioned so far, 2019 appears to be more rational from that perspective across all categories.

Elad Elie Hillman -- JPMorgan -- Analyst

That's helpful. Thank you. And the second thing I was wondering was on Novel Park. I think your prior expectation was for it to open in 1Q. And now it's in 2Q and it's encouraging the interest list is up to, I think, you said 4,500 parties, up from 2,000 last quarter. I'm just wondering how confident you feel about the timing of the community openings and what are some of the -- maybe headwinds that potential delays that you've been facing. Thank you.

Matthew R. Zaist -- President, Chief Executive Officer,

Well, look, you're kind of talking about really 1 month or a 1.5 months, kind of adjustment and anticipated opening. I can tell you that, the weather in Southern California has been a typically wet over the last couple months, as know we staring out the window, looking at gray skies and rain. So that's just one of those things things adjust based on whether, there's, we feel pretty confident in that timing forecast. And certainly as you mentioned the increase in absorption -- or increase in our interest list over the last three months, adding a couple of thousand people is highly encouraging.

We remain focused and excited about the fact that we've got 20 of our 27 forplans that we're offering, are the lowest price new homes and Irvine and central Orange County. So I think, we're excited to get it into the marketplace and our construction team is working hard to put us in a position to get there -- one spring selling season is still apart.

Elad Elie Hillman -- JPMorgan -- Analyst

Great, thank you.

Matthew R. Zaist -- President, Chief Executive Officer,

Appreciate it.

Operator

Thank you. And our next question is from Jay McKnight with Wedbush. Please go ahead, your line is open.

Jay McKnight -- Wedbush -- Analyst

Hi, good morning, guys. The first question I had -- what was the cancellation rate in the quarter and how does that compare to last year?

Matthew R. Zaist -- President, Chief Executive Officer,

Yeah, Jay, it's Matt. Cancellation rate for the fourth quarter was 24% which compares with 19% in the third quarter of last year and 17% in the fourth quarter a year ago.

Jay McKnight -- Wedbush -- Analyst

And then on average pricing with the security that you guys have between the average backlog price and average closing price. Is this 470 that you've given for 1Q '19 is that probably a good number to use for the year or is that going to trend down as more RSI comes into the fold.

Matthew R. Zaist -- President, Chief Executive Officer,

Yeah, Jay, it's Matt, I think actually we would expect it to trend up a bit and really part of that is just the new community openings that we have over the course of really the first two quarters of the year. I think, if you think about ASP for the year using 470 for Q1 and think about our full year last year, being just under 500. We would expect to be somewhere in between those two numbers on a full year basis. It's really just mix based on community count ins-and-outs.

Jay McKnight -- Wedbush -- Analyst

Got it, got it. And then the last question I had with, I know you guys are probably spinning money right now to get financial services up and going. What from a dollar perspective or basis points on sales, should we expect that to be over the next couple of quarters before you start generating revenue on it?

William H. Lyon -- Executive Chairman of the Board

Yeah, I don't know -- really what we've got is, we've got some headcount associated with that. You know, Jay -- I don't think we really view that as a being a headwind. It's been embedded in our G&A numbers over the last couple of quarters, as we've been the staffing up and ramping up for that. So it's in SG&A you know, plug right now. I do think that as we think about year-over-year, we do see SG&A as an opportunity to -- get better leverage out of our operations, certainly bringing financial services on a wholly owned basis is going to create an incremental revenue stream for us.

I also think we --as we've been dealing with the slower growth that we saw in the back half of last year, and we're going to just make sure that all aspects of sales and marketing as well as G&A are appropriately scaled through what we anticipate doing on a full year basis, but I wouldn't anticipate the lead up to launching our financial services a wholly owned basis, creating too much disruption from a SG&A perspective.

Jay McKnight -- Wedbush -- Analyst

Okay, sounds good. That's all my questions. Thank you.

Matthew R. Zaist -- President, Chief Executive Officer,

Thanks.

William H. Lyon -- Executive Chairman of the Board

Thanks, Jack.

Operator

Thank you. (Operator Instructions) And our next question is from Alex Barron with Housing Research. Your line is now open.

Alex Barron -- Housing Research -- Analyst

Hey guys, how are you.

Matthew R. Zaist -- President, Chief Executive Officer,

Good.

Alex Barron -- Housing Research -- Analyst

I just wanted to check, I guess you know your thoughts on your approach to specs. How, if anything, this slowdown has changed that -- whether you guys are thinking of starting less facts or changing the number of spec you carry on hands, just kind of any thoughts around that.

Matthew R. Zaist -- President, Chief Executive Officer,

Yeah look, I think it's one of those things that -- look, I still believe that the entry level buyer is somebody who's typically coming from a rental situation is looking at a shorter window to purchase a home. Obviously that means we've got to be looking at a project-by-project basis. Weekly to make sure that our sales rates and demand are in line with our production forecasts. As we look at our spec inventory ending 2018 compared to the end of 2017, our Delta was I think, we were maybe a half a spec per community, higher year-over-year attributable to slightly slower demand, as we mentioned.

So I think we've been doing a good job of making sure that we are continuing to focus on that and not get too over our skis, certainly as you move up and the price spectrum and get into any sort of move up product or active adult -- that's certainly something that we believe is a major order type model, an entry-level. I think, we still believe that you need to have some component of your business focused on spec.

Alex Barron -- Housing Research -- Analyst

Got it. And then, I was also hoping you can comment on your entry level exposure like what percentage of your communities, would you say are entry level right now versus what percentage of your sales are entry level and where do you see that over the course by the end of this year trending to?

Matthew R. Zaist -- President, Chief Executive Officer,

I mean, we really looked at it. Alex from a lot position more so than straight community count. Slide 11, in our deck, (inaudible) gives you our units, so all our units closed -- units and backlog as well as, breakdown of lots owned and controlled by that buyer time. Really entry levels got accounted for -- bit more than half of our sales backlog and lots owned. Obviously, also has a higher than kind of company average absorption rate. So, community count wise that would be slightly lower than that, but community count is going to be somewhere in that mid 40% range, entry-level first time buyer.

Alex Barron -- Housing Research -- Analyst

Okay, got it. All right, well thanks.

Matthew R. Zaist -- President, Chief Executive Officer,

Appreciate it.

Operator

Thank you. Our next question is from Scott Schrier with Citi.

Ken Ling -- Citi -- Analyst

Hi, good morning. This is Ken Wang on for Scott. Thanks for taking my questions. In terms of construction costs and labor availability, are there any regions are getting a little bit better? I know you called out a little bit from the utilities in California, but just wondering if there's anything that, looks better from your front?

Matthew R. Zaist -- President, Chief Executive Officer,

Yeah, Ken, I think, certainly in some of the input cost side of our business is looking better year-over-year. Obviously, lumber last year got, fairly expensive and we've seen that abate a bit. As, I also mentioned earlier on the call, as we've grown in size and scale, is given us the ability to put in place more of a centralized purchasing team that's helped us on the manufacture products side.

Get better price protection, better forward commitments on manufactured products, which is definitely something that -- has helped our cost side of our business. And I would say, generally speaking, labor has been flat to slightly improving in some of our markets. I think, some of that is as we've gotten some better size and scale in some of our markets. So, I think we're doing better job of attracting attention of better quality subs. But, I also think that it's market-by-market. I'd still say markets like the Bay Area is still remain probably one of the toughest labor environment. But, other than that I would generally say -- the labor is flat to slightly better year-over-year.

Ken Ling -- Citi -- Analyst

Great, thank you for that. And just looking at Washington and Oregon, we saw some larger absorption pieces than we expected. Is there any repositioning of product there or should we kind of just expect incentive to kind of spurred (ph) demand going forward?

Matthew R. Zaist -- President, Chief Executive Officer,

Well, I think, we think about Washington and Oregon is -- absorption of Oregon, which was was down year-over-year. I mean, the highlight for Oregon was -- their entry level absorption pace was over three month and look, we've got some flexibility in that market to reposition some products and that's certainly a priority for us is bringing more entry-level product into the marketplace to increase absorption there. Washington, as I said, Seattle as a whole. I think, probably got out ahead of itself relative to price appreciation last year.

As, we've made adjustments in that marketplace. I think we're seeing more stability and better cadence late in the fourth quarter and into this year, which is encouraging. We also highlighted our third quarter call that, our new community openings in King County are generally skewed toward that, entry level buyer segment and getting price points that are meaningfully below the median new home prices in that marketplace.

So that's, that was kind of our strategy that we're implementing at the end of last year. And as I said, I think we've seen better responsiveness in Seattle, over the course of 2019 versus the back half of '18. I think, Oregon still one that we're watching. And, I think we haven't quite seen the same rebound that we saw in Washington this year.

Ken Ling -- Citi -- Analyst

Great, thank you and good luck.

William H. Lyon -- Executive Chairman of the Board

Thanks, Ken.

Operator

Thank you, and we have a follow-up from Jay McCanless with Wedbush. Please go ahead.

Jay McCanless -- Wedbush -- Analyst

Hey ,thanks for taking my follow-up. What was the ending community count at the end of the fourth quarter and then also, what was the goal -- I missed the number you guys gave for work community count should be? I think you said by mid-year?

Matthew R. Zaist -- President, Chief Executive Officer,

Yeah, Jay. Ended December, at 118, and so -- said we felt like Q1 was going to be sequentially pretty flat and 125 by mid-year.

Jay McCanless -- Wedbush -- Analyst

Okay, great, thanks.

Matthew R. Zaist -- President, Chief Executive Officer,

You bet.

Operator

And I'm not showing any further questions in the queue, sir.

William H. Lyon -- Executive Chairman of the Board

Okay, well thank you all for joining us. We appreciate you following William Lyon Homes and we look forward to talking with you on our first quarter of 2019 earnings call in few months. Thank you.

Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's program. This concludes the conference and you may all disconnect. Have a wonderful day.

Duration: 42 minutes

Call participants:

Larry Clark -- Head of Investor Relations

William H. Lyon -- Executive Chairman of the Board

Matthew R. Zaist -- President, Chief Executive Officer,

Colin T. Severn -- Senior Vice President and Chief Financial Officer

Alan Ratner -- Zelman and Associates -- Analyst

Elad Elie Hillman -- JPMorgan -- Analyst

Jay McKnight -- Wedbush -- Analyst

Alex Barron -- Housing Research -- Analyst

Ken Ling -- Citi -- Analyst

Jay McCanless -- Wedbush -- Analyst

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