Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Meritage Homes Corp  (NYSE:MTH)
Q1 2019 Earnings Call
April 24, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Meritage Homes First Quarter 2019 Analyst Conference call. (Operator Instructions) Please note, this event is being recorded. (Operator Instructions). Please note this event is being recorded. Please note, you should limit yourself to one question and a single follow-up. You may reenter the queue, if you wish.

I would now like to turn the conference over to Brent Anderson, Vice President, Investor Relations. Please go ahead.

Brent A. Anderson -- Vice President, Investor Relations

Thank you, Andrew. Good morning and welcome to our analyst call to discuss our first quarter 2019 results. We issued the press release yesterday after the market close, so you can find it, along with the slides that we'll be referring to today on our call -- on our website at investors.meritagehomes.com or by selecting the Investor Relations link at the bottom of our homepage.

I'll refer you to slide 2 and remind you that our statements during this call as well as the in our press release and slides contain forward-looking statements, including our projections for 2019 operating metrics, such as home closings, closing revenues, and margins, as well as overhead and delivered earnings per share. In addition to expectations about market trends. Those and many of our projections represent the current opinions of management, which are subject to change at any time and we assume no obligation to update them.

Any forward-looking statements are inherently uncertain. Our actual results may be materially different than our expectations due to a wide variety of risk factors, which we have identified and listed on slide 2, as well as in our press release and in most recent filings with the Securities and Exchange Commission, specifically our 2018 Annual Report on Form 10-K, which contains a more detailed discussion on those risks.

We've also provided a reconciliation of certain non-GAAP financial measures referred to in our press release or presentation, as compared to their closest related GAAP measures.

With me today to discuss our results are Steve Hilton, Chairman and CEO of Meritage; Hilla Sferruzza, Executive Vice President and CFO; and Phillippe Lord Executive Vice President and Chief Operating Officer of Meritage. We expect to conclude the call within an hour, and a replay will be available on our website within approximately an hour after we conclude the call. It will remain active through May 8.

Now I'd like to turn the call over to Mr Hilton to review our first quarter results. Steve?

Steven J. Hilton -- Chairman & Chief Executive Officer

Thank you, Brent, and welcome to everyone participating on our call today. We appreciate your interest and I'll begin on slide 4. Considering the difficult market conditions we experienced in the fourth quarter of 2018. The first quarter of 2019 was a pleasant surprise. We announced on March 4 that our February year-to-date orders were flat year-over-year, which we considered a success. But March was the strongest month of the quarter, up 19% over last year.

We put up 7% order growth over the first quarter of 2018, with a total of 2,530 orders in the first quarter of this year. It was our highest quarterly order number since the first quarter of 2006, and that says a lot. Much of that was attributable to our strategic shift to more entry-level communities, as our orders from entry-level homes increased 26% over last year's first quarter. Aside from California demand was strong in all of our markets, particularly in the entry-level space. The decline in mortgage interest rates since November certainly had a positive impact, but targeted incentives by us and other sellers also helped boost the confidence of those buyers who feared, they maybe buying at the top of the market. As further evidence of their confidence, our cancellation rate was only 12% for the quarter, down from 21% last quarter.

Turning to slide 5; in addition to getting the 2019 selling season off to a good start, with that increase in orders, we also delivered a slight increase in first quarter closings. Despite during the year, the backlog was 15% lower than it was at the beginning of 2018. We achieved that due to a higher backlog conversion rate, as a result of closing more of our available spec inventory, consistent with our entry level strategy. Our conversion rate was 73% for the first quarter versus 60% in the first quarter of last year. 67% of our closes in the first quarter were from spec inventory, compared to 51% closings from specs a year ago.

Our strategic shift toward more affordable entry level and first move-up homes reduced our ASP 6% for the quarter, which resulted in a 4% decline in first quarter home closing revenue. When combined with the targeted incentives we offered in the fourth quarter of 2018 and the first quarter of 2019, we use these incentives to hit the volume targets we're looking, while partially offsetting the discounts with improved overhead leverage from incremental closings.

The combination of sales and brokerage cents (ph) were offered on the last last year to -- sorry the combination of sales and broker incentives were offered over the last two quarters, reduced our home closing gross margin by 40 bps and increased selling expenses by 30 bps, while helping to drive additional orders, while we expect to improve on those through the rest of this year.

Turning to slide 6; we believe our strategic shift to focus on the entry level and the first move-up market is clearly benefiting our orders and margins relative to where they would be, with a primarily move-up business like we had a couple of years ago. 36% of our communities and 45% of our orders in the first quarter of 2019 were entry level, compared to 32% of our communities and 38% of orders a year ago.

Our orders page for the entry level is approximately 1.5 times our average for all non-entry level communities, and our gross margins were also higher on average for entry-level and non-entry level homes. For those reasons, all the new lots have been put under control in the first quarter for entry-level communities, since we already have a good supply of lots for first move-up communities. We are strategically exiting our second move up business, as that market is much thinner and more challenged than the entry level and affordable first time move up communities -- first move-up communities.

We expect that should impact our margins throughout 2019, but to have minimal impact next year. In short, our strategy is proving to be the right strategy for us, as it addresses the needs for millions of millennials and Baby Boomers, who want to affordable homes in highly desirable communities, and a simplified and streamlined purchasing process.

Along those lines, one of our latest developments is to simplify and streamline the process -- the process, that is our partnership with loan depot, who is offering a fully automated, secured digital pre-approval process, exclusively for Meritage Homes and available on our website. Using this technology, there is no need for a loan consultant to review and approve applications. So homebuyers should be pre-approved for a new Meritage Home anytime anywhere in less than 15 minutes.

It's another example of Meritage's commitment to innovation, and I'll now turn it over to Phillippe to discuss some of the highlights of our sales trends. Phillippe?

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Thank you see Steve. Our orders for the first quarter of 2019 were up over the first quarter of 2018, in the Central and East regions. With the West region down just 3%, primarily due to the continuation of softer market conditions in California.

I'll provide additional little color beginning with the East region on slide 8. Our objective in East is to grow our business in order to gain leverage, and we've been accomplishing that by opening new entry level communities that are selling well, much better than the move up communities they are replacing. In fact, the first quarter orders in our entry level communities were up 59% over last year in the East region. East region orders were up 20% year-over-year in the first quarter, with a 16% increase in average active communities, and slightly higher absorptions. The region was led by order growth of 58% in Tennessee, where we increased community count by 75% over last year's first quarter. Demand there was strong in our new communities and improved throughout the quarter. Orders were up 46% in North Carolina, due to the combination of 35% expansion in average community count, and an 8% increase in absorptions over last year. Those gains were primarily associated with our entry level communities. Charlotte was especially strong after a surge in March orders. Demand also improved in Florida during the first quarter, with a 14% increase in orders, mainly driven by more community openings and stronger demand than we experienced when interest rates rose in the third and fourth quarter of last year.

As a result of our shift to entry level, our average sales price on orders for the East region was 4% lower in the first quarter of 2019 compared to 2018. The total order to value was 14% higher due to community count growth and stronger absorption.

Slide 9, moving to the Central region, Texas produced an 8% order growth and a 10% increase in total order value, as we not only grew our entry-level business, but also had solid success selling through our higher end move-up community in Dallas, which had previously been a drag on our overall results in Texas. Those orders for higher end homes increased our ASP for the quarter, which we expect to be only a temporary as we sell through our remaining 2MU communities. While the longer-term trend for ASPs should come down, as the percentage of orders from entry-level communities increases. Absorption is in Texas were 13% higher in the first quarter of 2019 versus 2018, given the strong spring demand experienced across all four markets there.

Slide 10, our orders in the West region were down just 3% from the first quarter 2018, despite a 24% decline in California, where demand is softer than other parts of the country and absorptions are much lower than the market had experienced there for several years. A 12% increase in average community count nearly offset the 14% decline in order pace for the region. We've rebuilt our community count in Colorado over the past year, after years of selling (inaudible) faster than we could replace them. Demand remains healthy there, though as we return to historical levels after successive tightening of affordability over the last couple of years.

I will now turn it over to Hilla, to provide some more additional information. Hilla?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

Thank you, Phillippe. I'll provide some more details on our P&L results, as well as land and operating metrics, beginning on slide 11. As we noted, when we reported last quarter, we expected our first quarter 2019 closings to be down year-over-year, due to a 15% lower starting backlog. So we are pleasantly surprised that closings were actually up over 2018, and closing revenue was down much lower than we had anticipated. Although we didn't provide earnings guidance for the quarter. We far exceeded our internally forecasted earnings, with better than expected top line performance. The year-over-year decline earnings was due to a combination of slightly lower home closing revenue and profit, as well as an increase in interest expense in several one-time items impacting the year-over-year comparisons.

Our gross margin slipped to 15.7% from 17.1% in the first quarter of last year, primarily due to the targeted incentives that Steve discussed, and reduce leverage of our construction overhead expenses from lower home closing revenue, despite a 2% growth in closing volume. Additionally, we had a benefit in the first quarter of 2018 of $1.4 million in litigation recovery, that increased our gross margin by 20 bps.

The lower revenue also had a negative impact on our SG&A leverage, which increased to 12.3% of total home closing revenue, up from 11.5% in the first quarter of 2018. Compared to the first quarter of 2018, our 2019 SG&A expenses included higher brokerage commissions, severance costs of approximately $1.1 million and another $1.4 million for accelerated equity compensation pulled forward into Q1 from future period. The combined impact of those three items on SG&A amounted to about 50 bps. We expect to improve our SG&A leverage throughout the year, assuming market conditions remain steady. Interest expense increased $3.9 million, primarily due to less interest capitalized to assets under development, which was a result of faster construction times and turnover inventory, as part of our entry level strategy. We expect that to continue to be the case throughout 2019.

The negative year-over-year earnings comparisons was also due to first quarter 2018 net earnings benefiting from a favorable legal settlement of approximately $4.8 million, which accounted for most of the decline in net other income. Finally, our effective tax rate was 21% in 2019, compared to just 10% in the first quarter of '18, when we benefited from a one-year extension of energy tax credits for all qualifying homes closed in 2017. This benefit recorded in the -- first quarter of 2018 totaled $6.3 million. We expect our effective tax rate for the remainder of the year to be about 25%.

Slide 12; turning to the balance sheet and cash flow items, we used $9 million to repurchase approximately 200,000 shares during the first quarter of 2019, and spent approximately $141 million on land and development in this year's first quarter, $62 million less than last year's first quarter total of $203 million, partially because the lots we purchased were for entry-level homes at a lower average cost. We ended the first quarter of 2019 with total lots of approximately of 33,800 compared to 34,000 at March 31, 2018. That translates to a lot supply of approximately 3.9 years this year, compared to 4.3 years last year, based on trailing 12 months closing. About 71% of total lots inventory was owned and 29% optioned at March 31st, 2019. Consistent with our strategy to increase our focus on the entry level market, we are building more specs in those communities. We ended the first quarter of 2019 with about 2,200 spec homes, or an average of 8.5 specs per community compared to an average of 7.9 per community a year ago. Approximately 36% of total specs were completed as of March 31, 2019

Slide 30, we are encouraged by the outlook for interest rate stability and are optimistic that the spring selling season will continue, as it has begun. We will remain cautious in projecting quarterly results. Based on our first quarter results and net outlook, we are currently projecting 2019 home closings and total home closing revenue of approximately 8,200 to 8,700 homes and $3.25 billion to $3.45 billion respectively for the full year. We're anticipating home closing gross margin to be around 18% for the year, with slightly higher SG&A than 2018, due to increased commissions expense and approximately $4 million of start-up costs to open our studio and showrooms in the remainder of our markets this year. Interest expense will trend down from Q1, but continue to be higher than 2018, due to lower land development spend and faster asset turns. Operating margin should improve throughout the year, and we expect to generate $4.65 to $4.95 of diluted earnings per share for the full year.

For the second quarter of 2019, we're protecting 1,900 to 2,100 closing for a total home closing revenue of approximately $760 million to $825 million and a home closing gross margin percentage in the mid 17s for the quarter, which reflects higher incentives offsetting cost savings over last year. We expect SG&A interest expense to be higher than 2018 for the reasons I stated earlier for the full year, translating into approximately $0.95 to $1.05 of diluted earnings per share for the quarter.

Upside to those estimates could occur, if stronger demand persists throughout the selling season and beyond, to the extent of at least additional closing volume from spec inventory, as our first quarter results demonstrated. That is the benefit of our strategy, but we don't have as much visibility into future closings, due to our lower starting backlog and higher conversion rates, and the current uncertainties in the housing market. We plan to update our outlook next quarter, with the benefit of the spring selling season completed.

With that, I'll turn it back over to Steve.

Steven J. Hilton -- Chairman & Chief Executive Officer

Thank you, Hilla. In summary, we are pleased with our first quarter results and the solid spring selling season we've experienced in the first three months of the year. Demand for new loans remains healthy, and we believe that demand we've seen so far in the spring selling season will reflect sustained positive macroeconomic factors for the housing industry. We're confident in our strategy and pleased with the results of our LiVE.NOW. communities, and the early success of our streamlined Studio M offering for first move-up homes. There's still a shortage of entry-level product for buyers who are looking for more affordable homes that meet their needs and give them some extras to satisfy a few of their wants. We believe that is exactly what we provide with our new Meritage Homes.

Meritage offers are industry-leading, energy efficiency, home automation, attractive and fresh designs in all of our homes, along with a stress free experience for buyers purchasing their first home. It's clear that buyers appreciate those advantages, as our customer satisfaction scores have increased to industry leading levels, as we've implemented those improvements. I'm proud of our entire Meritage team for putting our customers first, and working hard every day to making the company successful. We're confident in our abilities to make the most of the opportunities ahead of us, and we expect to continue to grow and deliver increased shareholder value.

Thank you for your support of Meritage Homes, and I'll turn it over to operator to open it up for questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Alan Ratner of Zelman & Associates. Please go ahead.

Alan Ratner -- Zelman & Associates -- Analyst

Hey guys, good morning. Congrats on the quarter and on the entry level strategy. So was hoping just to get a little bit more info on the -- kind of the pricing dynamics in March. The orders were obviously very strong, and I know and I think in January you mentioned some of the incentives in the market was very sensitive to those incentives, where you kind of read a lot of contracts when you had the incentives out and then when you tried to pull them back, maybe the market softened a little bit. So what were you doing in March on the incentive front, when you experienced so strong sales? Would you say the incentives drove the sales, or were they in spite of actually pulling back a bit on incentives?

Steven J. Hilton -- Chairman & Chief Executive Officer

No. We didn't do anything unusual in March. We had a national promotion in January, that we call flat sale, which was very successful, drove a much better January than we previously announced, that January was up 10%. I think that result -- that sale had a big impact on it. In February, we had a interest rate buydown (ph) program, as rates continue to fall, it didn't really resonate with the buyers and orders in February were a little bit less. But we didn't do anything on a national basis in March, and we just left it up to our local operators and the incentives were pretty consistent with what we've been doing now for many months.

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Yeah, this is Phillippe, I would just say that they were not higher in March than January and February, in fact they were slightly lower. So March was just stronger, without really tweaking incentives beyond what we had originally done in January and February, although slightly lower.

Alan Ratner -- Zelman & Associates -- Analyst

Thanks for that guys. That's great to hear. And then second question, obviously the entry level push seems to be paying some nice dividends here for you on the order side. At the same time, there has been some incremental tightening from FHA over the last month or so, targeting the high DTI, low FICO loans, as well as the -- some down payment assistance program. So was curious if you guys have kind of looked into your business, how much of that is reliant on those types of loans and whether you've seen any impact thus far, through April from the changes from FHA?

Steven J. Hilton -- Chairman & Chief Executive Officer

We have not seen any real impact from that. We have very few buyers that fit into that category and we don't expect to be impacted from that at all. Our average DTI is about 38%.

Alan Ratner -- Zelman & Associates -- Analyst

Okay. Thanks a lot. Good luck.

Operator

The next question comes from John Lovallo of Bank of America. Please go ahead.

John Lovallo -- BofA Merrill Lynch -- Analyst

Hey guys. Thank you for taking my questions. The first one Hilla, I believe, if I heard you correctly, you mentioned that interest expense should taper off in the second quarter and perhaps throughout the year. Can you just help us frame kind of the EPS impact for the full year at the expected level of interest expense versus, if the same percentage was capitalized as we experienced in the fourth quarter?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

The percentage capitalized is going to be consistent. That's not changing. It's a piece that's breaking into the P&L, that is going to be slightly elevated. It's more elevated in Q1 than any other quarter throughout the year, so you should definitely be modeling something slightly less in Q2, Q3 and Q4, than what we find Q1, but it has been a slight bit higher than it has been last year, just because we have slightly lower land spend through the ability (ph) to capitalize interests to assets under production is lower, than just our home construction cycle, is turning much faster, so there is less months of inventory that get the interest component. So overall, actual interest hasn't really changed. Thus is it coming through margin or is it coming through the P&L and the interest line.

John Lovallo -- BofA Merrill Lynch -- Analyst

So is there a margin benefit in the first quarter from this?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

The interest in margin is fairly consistent, it's not moving too much. We are just turning that inventory faster.

John Lovallo -- BofA Merrill Lynch -- Analyst

Got it. And then finally, how should we think about the year-over-year impact from commissions and equity comp, 2Q through 4Q?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

The equity comp is a one-time charge in Q1. It just pulled some costs forward with the change in the tax laws, at the end of '17, we had our one year tax shelters in 2018, and then that changed for us rolling into 2019. So there were some tweaks that occurred with the equity compensation timing, but not overall dollars. So you'll see the first quarter expense spike up,

but then there's no difference in modeling for the remainder of the year. The commissions are running at a slightly elevated rate right now, but lower than what we saw in Q1 and we are kind of monitoring market conditions and see if we can pull back on those that excessive commissions that we had to pay in Q4 and Q1.

John Lovallo -- BofA Merrill Lynch -- Analyst

Okay, thank you.

Operator

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

Paul Przybylski -- Wells Fargo -- Analyst

Yeah, this is actually Paul Przybylski on for Stephen. I guess, first off, could you give us some color on how April is transpiring, both from an orders perspective and also with respect to any incentives? And then if you're seeing any difference in incentive levels between LiVE.NOW. and the first move-up and move-up product lines?

Steven J. Hilton -- Chairman & Chief Executive Officer

Well, we have modestly pulled back on our incentives in April. But I'd say, very modestly. But April is feeling really -- we had five weekends in March, which really helped those results. The weather was phenomenal in March, interest rates continue to decline. The weather has been great in April. I'm very confident that we will have a plus over the last year for our April numbers and -- but we did have -- we did have Easter weekend only four weekends in this month. But feels really good right now. Certainly some markets are exceptionally strong, like Phoenix is one of those right now, in the entry level space, it's really, really strong. Other markets good are good as well. But some are certainly better than others.

Phillippe Lord -- Executive Vice President and Chief Operating Officer

And to answer the question on incentives between entry level, first move-up and other. I mean the incentives on on entry level, they are a little bit higher from last year, just to compete with what the other competitors are doing, but not much. First move-up, a little bit more than that. And then clearly we've articulated that we're aggressively getting out of the second move up business, so the incentives on the second move up business, are meaningfully higher than they were last year, as we try to strategically get ourselves out of those types of communities and reinvest that capital into entry level and first move-up communities.

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

You'll see those incentives slightly elevated from the 2MU business in our margins in the first half of the year and then kind of start to taper off, as we get to the end of the year and be really negligible since next year.

Paul Przybylski -- Wells Fargo -- Analyst

And dialing into the California with the order decline and the strong community count growth, did you see any improvement in that market, as we move through the quarter, as rates trended down? Or is that market really just set for a bigger pricing reset, but -- to get it to inflect?

Steven J. Hilton -- Chairman & Chief Executive Officer

I think, we saw certainly -- saw the seasonal improvement and we certainly saw more action on some of our lower price communities that we have newly opened. So I would say it's, very local in California. And some of our communities performed well and then some of our higher priced communities didn't perform as well. And -- but our bigger challenge in California has really been our community count, and starting to make some inroads there, getting more communities open.

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Yeah, we're going to see improvement in California just because of the community count wrap up. But locally, it's definitely the market where we're seeing buyers expectations around incentives being the highest. They want to make a deal. They are coming in with expectations that they're going to get a deal, and then as you look at the competitive landscape, other builders are aggressively delivering those deals. So it's a very competitive environment from an incentive standpoint right now.

Paul Przybylski -- Wells Fargo -- Analyst

Thank you. Appreciate it.

Operator

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

Nishu Sood -- Deutsche Bank -- Analyst

Thank you. Wanted to ask about the incentive environment. I think there's been some debate about how the fluctuations in interest rates and rising home prices, the kind of pressures on affordability, have driven the need for incentives and obviously across the different kind of product segments, entry-level versus move-up. The conventional wisdom says that, the entry level gets hit more by affordability concerns. But Steve your experience over the last couple of quarters shows that you've had more success through this difficult period with the entry level. So I just wanted to get your thoughts on that. what can we take from that? Is it really company-by-company, is it just specific or what are you seeing in the market generally? Like what part of the market has been more affected by the volatility here, and rates and affordability and where -- how has that driven the use of incentives differently in each of those end markets?

Steven J. Hilton -- Chairman & Chief Executive Officer

Well, I think two things are happening; number one, the entire entry level market has been underserved, OK? So, there has not been enough supplier capacity or product, (inaudible) need, to serve the entry-level market, as the entry-level segment is getting bigger, because of the millennials are becoming more into their home buying years. So that is way offsetting the negative impact from rising rates that we saw last year.

In addition, housing prices have climbed quite a bit over the last 15 years. And you go back to what the prices were in the mid-2000s versus what they are today, since they rose -- they have risen a lot for a lot of reasons. So a lot of people skipped the entry-level market, went to the first move-up market or beyond, are now coming back to the entry-level market. So then we have these rate (ph) movers that are moving down and buying entry-level homes as well, because housing is expensive, but they still want new homes. So I think those factors are mitigating the rise in interest rates, and that's why ourselves and others that are in this entry-level space are doing well.

Nishu Sood -- Deutsche Bank -- Analyst

Got it, that makes sense. On SG&A -- so in the quarter, we had some SG&A deleveraging, even if you take out those one-off factors that you mentioned Hilla. So the deleveraging driven by the fact that revenues were down because of ASPs, even though volumes went up, your ASPs will probably continue to fall, obviously based on the success of your entry level strategy. So how should we think about SG&A leverage going forward? You mentioned you expected to happen throughout the rest of '19. So what will that require and what's driving that dynamic where even with the ASP, declines are driving the deleveraging?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

I think you already touched on this, but I'll just cover again. There is 50 bps in that 12.3% number of that are either commission related which we expect to kind of taper off toward the end of the year, or one-time item related, which we don't expect to be recurring, because of that elevated starting point, we are going to be slightly elevated, our expectation and our guidance would slightly elevate SG&A for '19 over '18. Although there are a lot of efficiencies that are going to be coming through, once we exit our second move-up communities. They are highly inefficient to running the absorption pace (ph) , doesn't think of the rest of our community strategy. So once those fall off and we're able to redeploy those resources, back into more effective and efficient communities and the move-up -- first time move-up and entry-level space we will be able to get back to the target numbers that we have for SG&A leveraging.

Nishu Sood -- Deutsche Bank -- Analyst

Got it, OK. Thank you.

Operator

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

Scott Schreier -- Citi -- Analyst

Hi, good morning. I wanted to know if you could talk a little bit about your gross margin bridge, what you might have seen from lumber deflation versus some of the other cost buckets where you're seeing inflation as well as some of the impacts from less overhead from your faster turn asset strategy. So maybe in the quarter, and how you're thinking about some of those things going forward for the year?

Phillippe Lord -- Executive Vice President and Chief Operating Officer

I'll take the cost piece of that and then maybe Hilla can piggyback on that. We were able to really get some great savings over the last three quarters, starting back in the second -- third quarter of last year. As you guys know, lumber was really structurally impacted in the first half of 2018. We were able to claw those costs back successfully and our costs are -- our lumber cost are pretty much back to what they were before the ramp up, and those are all captured in our go-forward business. We captured most of that in Q1, saw that in our margins. So it helped us offset the additional incentives and commissions that we're offering in the market. They are related to our forward-looking kind of vision into the cost. The costs are pretty stable right now. Labor is pretty stable. Our key commodities are pretty stable. But we're not tracking any spikes in lumber or concrete etcetera, etcetera. So we feel pretty good about a stable cost environment go forward.

Lastly and I'll let Hilla piggyback, we've just been really dialing in the cost of our products, as we rolled out our entry level strategies, and we've been able to really refine our product offering, which has allowed us to build homes in a more efficient manner and a more cost effective manner. Repeating what we're doing there and we know to drive a lot of efficiencies in our cost structure through the pivot to entry level, which has also benefited our costs as we go forward. So we continue to capture those opportunities to help us manage the market. I don't know, if you have anything to add?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

Sure. I think we mentioned on prior calls that we expect the benefit from lumber to be about 100 bps in the margins. So most of that is now fully baked into our Q1 numbers. We've had a couple of the successive quarters of home construction with those lower rates locked in. Now the offsets there of course are higher incentives, and slightly lower revenue, that's offsetting the fixed components of our overheads. So there is some fixed component in the margin. That's a lower overhead. It's a lower revenue that's not offsetting all of the overhead. Now just a reminder on the lumber, the improvements are there from Q3 and Q4. First quarter of last year did not have elevated lumber. So when you are comparing apples-to-apples, the lumber is actually fairly consistent with what it was last year's first quarter. So there's not a benefit on a year-over-year basis, even though there is a benefit on a successive quarter basis. So that's kind of how that will shake out with the 40 bps change, it's really just the higher incentive. We were able to recapture some of that with incremental volume and savings from our entry-level strategy. And then just a reminder, we mentioned this in the script, we have about 20 bps that used up last year's first quarter margins, gross margin, that was related to a successful settlement from a legal case that was actually running through margins. On kind of apples-to-apples, it was 16.9% to 16.7%. So the incremental decline on a year-over-year basis is really nominal.

Steven J. Hilton -- Chairman & Chief Executive Officer

I would also add that we had a reduction in headcount event in January, we've reduced our headcount 6% or 7% and that's why we took the $1.1 million charge. But we're really trying to be mindful this year of our hiring and trying to be more efficient with our overhead -- reaching our overhead levels to last year or below.

Scott Schreier -- Citi -- Analyst

Great, thanks. I appreciate all that color. For my second question, I wanted to ask about Colorado. Your absorptions still declined there significantly, but you were -- or I should say, despite the fact that you are able to get your ASP down 7%. So I'm curious if you still have to burn through the product that you have there to get lower priced product on the ground and offer more incentives? Or is there something different there, maybe an overall slowdown in the market that you're seeing?

Steven J. Hilton -- Chairman & Chief Executive Officer

I wouldn't read too much into that. The timing, we have the new communities open, that weren't open for the full quarter. Business in Colorado is very good. Clearly, if you're at the lower end, you're going to do better. But I would not lump Colorado in with California. We're feeling pretty bullish about our business and our positioning up there and where is that -- I don't know if you want to add some more to that Phillippe?

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Yeah, -- no I wouldn't add too much, I mean it. It's definitely a market that has been impact by affordability. We saw that come in two years ago and started buying more entry-level stuff. So that pivot has offset some of the softening that has occurred in the higher end. But we had some really strong move-up and second move-up communities in Colorado. It's a very strong market. So although absorptions are off a little bit in that space. They're still pretty good from a company perspective. And then we continue to open up the entry-level business, which is offsetting some of that softening in the higher end.

Scott Schreier -- Citi -- Analyst

Great. Thanks for that. And good luck.

Operator

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

Stephen Kim -- Evercore ISI -- Analyst

Yeah. Thanks a lot, guys and good job in the quarter and navigating the market. I wanted to ask about the incentives. It sounds like you're moving a little bit more away from the national type incentives to maybe more regional ones, leaving it up to the local guys. I assume that's going to continue going forward. So should we assume from that, that we are not going to see the national flash sale that you did in January, via repeating event? Or is that actually incorporated in another one --

incorporated in your full year guide? And then specifically to California, I know in the Inland Empire, you were bringing on a number of communities over the course of this year. I was wondering how your attitude has changed, if at all, with respect to that and if your absorption pace is OK, enough, sufficient at present or do you think you're going to need to increase your incentives there, more than you already have?

Steven J. Hilton -- Chairman & Chief Executive Officer

Stephen, I would disagree with the first part. I would say, a good fishermen is always changes his bait, and we're not going to tell the fish when we're going to change the bait and what bait we're but we are going to use. But we are going to be really nimble and creative, and one month there maybe a national promotional and the next month there maybe a local. But we have some definite plans and ideas for what we're going to do the rest of the year. And we are learning what's working and what's not. The (inaudible) were great in January, but you can't do that every month, because then it's not going to you now have the (inaudible) of course. What was the second part of the question?

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Inland Empire.

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

Inland Empire.

Steven J. Hilton -- Chairman & Chief Executive Officer

Inland Empire. We are not a good barometer for the Inland Empire. I think we have two stores open out there. So I would encourage you to seek out others to really get a beat on that market.

Stephen Kim -- Evercore ISI -- Analyst

Okay. My sense was that you were going to be bringing on a number of them over the course of the next 12 to 18 months. I guess that's not really the case then going forward?

Steven J. Hilton -- Chairman & Chief Executive Officer

No, we are bringing on some more stores out there. But again until we are open. You're not really going to get a beat on what's happening there.

Phillippe Lord -- Executive Vice President and Chief Operating Officer

As we sit here today, we have two communities opening in the Inland Empire. One has been open for a bit here. And another one that just opened, and they're doing OK, right. Like Steve said, there's lot of diversity to the Inland Empire, and we're only in two sub-markets. And so we're just not a good, a data point on how that market is doing.

Steven J. Hilton -- Chairman & Chief Executive Officer

I'm hearing from other builders that we are talking to, that it's kind of a mixed bag. Some people doing well in certain locations and some are not.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, that's fine. Okay. And then regarding margins, just as a -- from a longer-term perspective I look back, Meritage generated double-digit operating margins in the previous cycle, and that was even when you were not really doing much in the way of land development. Today you're willing to do a little more land development. And so I was curious, just longer term, is a double-digit operating margin simply not in the cards over the next couple of years, or do you think it is, and if it isn't, what would be the reason for that?

Steven J. Hilton -- Chairman & Chief Executive Officer

Well, it's not in the cards this year. But certainly we hope it to be in the future. But we're really targeting more of a 10% or a mid 20% gross margin and getting our SG&A close to 10% to get to that double-digit operating margin. And we got to clear out the 2MU (ph) . We got to get our entry level position higher and we got to get more efficient. In the last cycle we had 40% entry-level. So we're just getting back to that point, to where we were in the last cycle. And there's a whole variety of other factors why we are not double-digit today. But clearly, that's our aspirational goal of where we want to be.

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

And then Stephen just one more comment on that. We have been telegraphing our intent to pivot on entry level and first time move-ups. So there's a little bit of inefficiency, as you make a pivot, since you are carrying some of the old product and the old processes as you're converting to the new product and the new process, as we read through the higher level, higher price points, community that require different operating structure and we are fully implemented in just entry level and first-time move-ups. You will see the full benefit of the efficiency that we're putting in place right now.

Steven J. Hilton -- Chairman & Chief Executive Officer

But we 100% believe that the clearest path for our business to get to a 10% double-digit operating, is all about volume, and our entire strategy is built around driving higher volume per store, being able to build those houses faster, and more efficiently, and our goal is to get there through that strategy.

Stephen Kim -- Evercore ISI -- Analyst

Yeah. You guys have been really clear about that and definitely making progress. So that's been good to see. My last question is related to volume; in the past, Meritage has been among the builders that has been the most -- has grown -- had the most success with integrating acquisitions. You stubbed your toe on a recent slate several years back, but that's been kind of a while ago. I am curious with your pivot here that you've made, more toward the entry level, whether you feel confident enough in the degree to which you have worked through that transition, to now once again be open to doing M&A, and we have observed that the M&A in the industry seems like it has been pretty strong as -- over the past year or so, and curious if you could speak to the pipeline you're seeing out there, your general interest level, and your preparedness to do something in that regard.

Steven J. Hilton -- Chairman & Chief Executive Officer

We are ready to do M&A. Our eyes are open to M&A opportunities. We're regularly looking at them. But we're going to be very disciplined about doing one that fits with our strategy. So buying a move up builder is really not going to -- good for us and we -- our preference is to find somebody who is in a market that we're already in, so we can leverage our overhead. And we just have not seen those opportunities that fit with our strategy at prices that make sense. That's not to say, there is not going to be anything in the future. But many of the deals that we've seen over the last couple of years, just really haven't fit for us.

Stephen Kim -- Evercore ISI -- Analyst

Great, that's very helpful. Thanks very much guys.

Steven J. Hilton -- Chairman & Chief Executive Officer

Thank you.

Operator

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

Alex Barron -- Housing Research Center -- Analyst

Good morning guys and congratulations on the move. I think it's working nicely. (inaudible) quarter, closely around the -- I guess the benefits of being more in this new kind of spec entry level driven model. I'm just curious if you can speak to, what do you think or in your experience so far has been the more interesting changes in either been in the year -- In the sales space you're able to see or in the cycle time to build these homes, or in the ability to change or improve your margins based on how much you're able to, I guess, buy things in bulk, can you just kind of talk about your experience on benefits you've seen so far?

Steven J. Hilton -- Chairman & Chief Executive Officer

I mean it's both. I mean, we -- (inaudible) just to touch. Alex, we're getting more feedback from it. But it's both. We're seeing from our surveys and talking to our customers that more than half of our entry level customers are renters, and they don't want to wait six months for a home, they want to move in sooner than later. They don't want to go to the design center, get overwhelmed by all the different choices and selections. But they do want a premium finish. They want a nicer carpet, nicer flooring, nicer cabinet. So we're able to meet those needs and demands of those customers with the way we're selling our LiVE.NOW. product. They come into our office, they come to our sales kiosks. They can see all the products that's available, when it will be ready. We can immediately text it to them on their phone or email to them. They love that and that's really really helping. And on the other side, the production side, our contractors that work for us really love having a consistent pace. They really prefer building spec houses over build-to-order, it's easier for them. They keep their got -- their people on our job site. We are giving better pricing. We have value engineered a lot of our product now across the country. We've been able to reduce our construction costs significantly, as we pivoted to entry-level and so it's working for both sides of the equation. When we get our costs down, we're able to deliver better value to the customer, which allows us to sell more homes and be more competitive with those other high-volume entry level builders. So we learn a lot every day. Not only in the entry level space, but also in the move up space, I would encourage you to come out and see one of our new Studio M's. I think there -- it's revolutionary, the way that we're approaching colorization and design for the move-up buyer by moving away from the a-la-carte model to a model that offers seven or eight or nine professionally curated choices for those customers, that include the cabinets, the countertops, the paint colors, the flooring, all in one module, one designated package, and all the packages are the same price, and the feedback we're getting from our customers is they really love it and it really makes the whole design center experience better, allows us to sell more options at a higher margin, and move the people through the process in a quicker and more efficient timeframe. So we're excited about what we do on an entry-level side and what we're doing on the move up space, it's both of those things combined and are going to make us much more efficient over the long term.

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Yeah. Alan this is Phillippe. I just can't emphasize enough what building homes faster does for our business, and in the entry level space, we been able to shave off anywhere from two to three weeks in our bill time on average companywide, as we rolled into these entry level communities. And that has just allowed us to drive a much more efficient cost structure. As Steve articulated, the trade point to work for builders have builds homes faster in a more predictable manner. So the speed in which we are building our homes is having a significant impact on our business.

Alex Barron -- Housing Research Center -- Analyst

Okay, great. And can you just talk a little bit, how low of a price point have you guys been able to achieve that this point? Like are there are some markets where you're in the mid 100's, like how low have you been able to get and which market, would you say right now, you're kind of the furthest along into this kind of transformation revolution?

Steven J. Hilton -- Chairman & Chief Executive Officer

Yeah. So we're not going to be the lowest per cost producer of entry-level homes. I mean there are guys, I have mentioned their names that are hitting a lower price point than we are. But we're -- in Phoenix we have one or two communities slightly below $200,000. In Texas we have a few communities that are slightly below $200,000. But we're definitely not going to be in the mid 100s. The sweet spot for us, for the entry level, is the $200,000 to $250,000 price range in those lower price regions and in Arizona and Texas and in the south. We are building quite a few more townhouse communities, particularly in the South and Florida, they are allowing us to drive down our ASPs and be more affordable. But again, we're not going to be the $150,000 or $175,000 builder anywhere.

Alex Barron -- Housing Research Center -- Analyst

Well, thanks. Got it, thanks. And good luck.

Steven J. Hilton -- Chairman & Chief Executive Officer

Thank you.

Operator

The next question comes from Michael Rehaut of JPMorgan. Please go ahead.

Elad Hillman -- JPMorgan -- Analyst

Hi this is Elad on for Mike. Congrats on the quarter and on the guidance. I was just wondering how we should be thinking about community count growth for 2Q and the full year? Given the strong sales pace for the quarter and the close out of some of the floor communities and the openings of the new community.

Steven J. Hilton -- Chairman & Chief Executive Officer

The community count growth is going to be flattish to slightly down for the quarter and for the year. We'll probably be able to get a better read on that next quarter. But we're moving through a lot of our -- second move-up communities faster than we originally anticipated, which is muting our community count growth.

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

Although you'll see the entry-level become a more meaningful percentage of our total competition of community.

Steven J. Hilton -- Chairman & Chief Executive Officer

Right. Right.

Elad Hillman -- JPMorgan -- Analyst

Okay, great. Thank you.

Operator

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

Carl Reichardt -- BTIG, LLC -- Analyst

Thanks. Hi guys and just following up on that. Steve, last -- at the end of last quarter, you talked about 15% of your store base being the second move up, and Hilla I think today, you said by the third and fourth quarter, you're expecting effectively minimal margin drag. So what's your composition of 2MU at the end of the first quarter. What will it be at the end of the year and what is the margin differential as you see it, of 2MU backlog versus a LiVE.NOW. or entry level backlog?

Steven J. Hilton -- Chairman & Chief Executive Officer

We have done some stats today and we put 2MU into the bucket. We call 2MU and other, so we have luxury in there and we have some active adult in there. And that -- we have 109 communities that were in that bucket a year ago. And now, we are down -- I'm sorry, I gave you the wrong number. We had -- what am I looking at here? It's down 23%. I don't know, what was the ending community count? Oh, we had 63 communities and now we've got 40.

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

It's going to continue to decline, but the sales pace in those communities is much slower. So you can hang on to what we consider an active community when you're selling one or two a month for quite a while. Right. There is going to be a noticeable decline in our community count for sure. But more importantly, the volume of the homes coming from those communities, that's going to become less and less meaningful to our total. And then as far as the margins, it could be a couple of hundred basis point difference in the margins between our first time move-up and entry-level communities versus the stuff that we're exiting.

Steven J. Hilton -- Chairman & Chief Executive Officer

Carl, we get a believer out of you today?

Carl Reichardt -- BTIG, LLC -- Analyst

Not a matter of belief, it's a function of just what that drag is and how fast you have to get out of it, that impacts how we think about things. You know what we think about the entry level. I wanted to go back though, and Stephen, ask you a little more about about Studio M too. And I'm just curious in terms of the rollout, how far along are you with it, and what's your anticipation of what it can do in terms of improving the speed at which you build, or is it a function of being able to better and more efficiently price options that would help your margins?

Steven J. Hilton -- Chairman & Chief Executive Officer

It's all of the above. We are -- by the end of this quarter, we will be halfway there, and the end of the year, we will be 100% of the way there. So every divisional has its Studio M by the end of the year, and we'll really have it dialed in really tight. What it allows us to do is, single source a lot of the products. You know, for example, all the flooring -- all the carpet materials and some of the EVP we're buying exclusively from Shaw. Shaw gives us better pricing. We've reduced the number of SKUs, and makes it more efficient for them. We're buying carpet by the roll, as opposed to by the house. And then the same thing with the cabinets and ceramic tile and wood flooring and the other components that go into -- that you sell to a design studio. We are able to get much better pricing. We were able to pass some of that pricings on to the customer, which gives them better value, but also allows us to increase our margin at the point of sale on those goods. So sometimes you're waiting for our product, but slowing down the construction cycle. We're not going to be having to wait for certain products, because we are buying less products, more products that are in stock, that we can get quicker, that we have in our vendor's warehouse locally. So this is just a whole plethora of advantages and we're not -- all these studios, for the most part, are being run my Meritage people, their in-house studios. We do have some contractual relationships with outside vendors to run a few of them. But we're also able to reduce the costs by running them ourselves versus contracting them out. So I think long term, it's going to be a great, great strategy for 1MU.

Phillippe Lord -- Executive Vice President and Chief Operating Officer

I think the last thing I would add to that is, if you go onto to other builders offer traditional design studio experience, you will find that it typically takes two to three appointments for a customer to make all of their selections. We're able to navigate our customers through our Studio M in one appointment, usually not taking more than two hours. So you can imagine that allows us to permit the house and start billing the house much faster than a traditional design experience.

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

And then just one last point, I don't know if you were alluding to this in your question or not, the reason why there is a drag on the financials and the SG&A, is as you're building these, you're incurring the costs. But the benefits are coming from the margin, those homes aren't closing yet. So since we are doing the rollouts throughout the country, this is going to be the year of transition and then starting in 2020, all the divisions will be closing homes, under the new Studio M option structure, in which you'll see the benefit of the revenue, versus just the expense running through this year.

Steven J. Hilton -- Chairman & Chief Executive Officer

We are open today in Florida. We are open in Houston. We are open in Denver. We are open in Tucson. We're going to be open in Phoenix really soon. And then we have many other markets, particularly in the south, coming right on the heels of that of course, by the end of the year, we'll have them all open.

Carl Reichardt -- BTIG, LLC -- Analyst

Okay. That is real helpful. Thanks everybody. I appreciate it.

Steven J. Hilton -- Chairman & Chief Executive Officer

Thank you.

Operator

I see that we're at the end of the hour. So there is time for hopefully one or two more questioners. The next question comes from Jade Rahmani of KBW. Please go ahead.

Ryan Tomasello -- KBW -- Analyst

Good morning. This is Ryan on for Jade. In terms of gross margins, can you quantify the approximate differential between the entry level and first time move-up product versus your other products. And similarly, the difference between your spec build and non-spec homes?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

So I think we just mentioned that there's a couple of 100 basis point benefit to our strategic projects product, which is entry level and first time move-up versus what we are currently exiting out of, which is anything higher level luxury second time move-up. A slight benefit on the entry level versus first time move-up, but they are fairly similar. It depends on the community and its geographies. So those are fairly consistent and then -- I am sorry, what was your second question?

Ryan Tomasello -- KBW -- Analyst

Just the difference between spec build versus non-spec?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

Oh, so entry level is 100% spec build. So there is no comparison to be built, that's all we offer, and that (inaudible) our business. So it is not really a differential for us between spec and non-spec. I will caveat that by saying there is a differential on the second time move-up between spec and non-spec, because we're trying blow through that inventory a little bit quicker and exit that segment of the market. But for the most part, it's fairly limited between spec and non-spec for us.

Ryan Tomasello -- KBW -- Analyst

And then just in terms of the land market, any noticeable change in competition or prices there or underwriting in response to the choppiness that the market has seen overall?

Steven J. Hilton -- Chairman & Chief Executive Officer

No, I mean we have seen people -- builders pull away from some things over the last few quarters just to fill out the market. But that hasn't resulted in land prices coming down. They're pretty sticky, and they are the last things to move. And now that sales are picking up, we don't really expect them to move that much. So I'd say generally, we haven't seen really any impact the land market.

Ryan Tomasello -- KBW -- Analyst

Thanks for taking the questions.

Operator

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

Susan Maklari -- Credit Suisse -- Analyst

Thank you. Good morning. My first question is just around, you talked to the improvement that you've been able to see in build times, as you've made this transition with your strategy. Can you talk to how much more you think you can realize there, and maybe what are -- how do we think about the constraints that are in place today, and what they will mean for build times, even as you fully transitioned to a more entry-level model?

Steven J. Hilton -- Chairman & Chief Executive Officer

I mean, we're building entry level homes today in less than 100 days. So we think that's pretty good. We might be able to get that down a little bit more, as we continue to drive some efficiency here. There's -- the constraints of labor and what -- I mean, all the other builders are building homes too, and so we don't think there's a big opportunity to drive that down. That's our target. We build a house in three months, that, that's a pretty good number. So I don't see a lot of opportunity to drive that down any further. But as we continue to make our product more efficient, focus on how we build those houses. Again Steve mentioned a number of times, how do we really drive a repeatable cost structure. There continue to be some benefits there, but I mean bringing (ph) out two to three weeks in the last year is really -- we thought would be pretty good and that's priority (inaudible).

The big impact is going to be, as we move $400 million to $500 million of our balance sheet out of these segments, which is entry level -- which is the second move up on luxury and some active adult, that we're not going to continue to pursue and move that money, which is not making much profit for us right now back into the entry level on the first move up, it should have a meaningful impact on our ROA, ROE and then our margins over the long term. So that's really what we're focused on. And then I also think that the new studio and it's going to allow us to build our first move-up homes faster and we will have some better cycle times there as well. So everything that we're doing today is in the pursuit of our long-term strategy to improve all of our financial metrics.

Susan Maklari -- Credit Suisse -- Analyst

Okay. Thanks. And then just as a follow-up, you mentioned in your opening remarks, some relative strength that you saw in Dallas. Can you just talk to generally what you've been seeing in the Texas markets, and maybe how it compares to your expectations?

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Yeah, I'll go around the horn. You know, San Antonio feels really good to us. I know other builders have suggested a more difficult market. We're doing really well there. We have great operations there. We know our markets. We know our products. So we are doing really well there. We feel like that market is strong, we have strong entry-level business there.

Austin continues to be extremely strong, specially below $300,000, all of our new communities that we have and the new communities that are coming on, are generally positioned there. We see tremendous strength below $300,000. Houston is kind of cats and dogs, the entry level s strong, certain move-up places are strong, second move-up slow. But overall, pretty healthy market.

And then Dallas is just -- it's highly competitive. It's gotten very unaffordable. It's very sensitive to interest rates. The move-up is much slower than the entry level. We need a lot more entry level, we haven't pivoted as hard there, its coming (ph) . But Dallas is probably the choppiest market of the four, and we see sort of buyer resistance, buyers wanting big incentives, especially the move-up. Overall, it's a strong market. Especially if you're an entry level business like some of our competitors, but it's a very choppy market.

Steven J. Hilton -- Chairman & Chief Executive Officer

I'd say also on Dallas, we had the best month in March in Dallas, since the last cycle. Since 2006, by a long distance. I mean, we really killed it in March and we're not really exactly sure why the star, the sun, and the moon all lined up in March in Dallas. It's not as good this month. But I'd also say we have 14 entry-level communities in the pipeline that are all going to be opening in the next 12 months or so in the Dallas metro area, that are going to dramatically reposition our products to much more entry-level focus in that market.

Susan Maklari -- Credit Suisse -- Analyst

Okay. Thanks for the color. Good luck.

Operator

And the last questioner today will be of Jay McCanless of Wedbush. Please go ahead.

Jay McCanless -- Wedbush Securities -- Analyst

Good morning everyone. So I guess on the 2MU and other, what is your internal timeline for getting those sold through and out of the way; because I think at this point, it seems like there's still potentially some earnings and revenue volatility as you guys try to move through (inaudible) and start.

Steven J. Hilton -- Chairman & Chief Executive Officer

Yeah, it's like still like 15% of our business. I don't think it's going to be all gone this year. But within the next four to six quarters, it will drop down below 10% and then closer to 5% and will become less relevant. But as we continue to make that pivot, it will continue to be a drag. But we won't be down to zero for quite a while.

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

We're not wholesale discounting this to get it off the books at large charges. We're selling it at low margin and we're getting it off the books as quickly as possible. But this is still a viable product, we're not wholesale discounting.

Jay McCanless -- Wedbush Securities -- Analyst

And then just a request, if you guys could start breaking that out, the 2MU versus the entry level, breaking that out in the orders and closings, because I think that would give us a better sense of where organic growth is in your core strategy?

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

Yeah. Its too small of a number of us to start breaking it at that level of peak (multiple speakers). Yeah that's the (inaudible). I mean it's going to be -- I think we have been pretty clear, it's going to taper off. There is going to be some continuing volatility from those incentives through the rest of '19 and by 2020, it stops being a meaningful impact on the financials.

Steven J. Hilton -- Chairman & Chief Executive Officer

We will try to continue to give you color on our every call. But I don't know that we can give that detail.

Jay McCanless -- Wedbush Securities -- Analyst

And just one other quick question, what are you hearing from investors, from the single-family rental guys? Is there an opportunity maybe for you guys to move some of this 2MU and even the land associated with it, move it off to some of those folks and help you get through that quicker?

Steven J. Hilton -- Chairman & Chief Executive Officer

They don't want 2MU. What they want is entry level, and we will talk to them, and the prices that they are offering, really we can't make money. So we didn't have really any success selling to them, our products. I mean, we are more of a premium entry-level product, generally buying more of a strip-down entry level product. And, we have been asked about why don't we just build communities for the single family rental market, and the answer to that is, why will we build for them and sell at a wholesale, when we can build it for ourselves and sell them at retail and make money on it. So again, we are not tone deaf to the old segment. We have certainly examined it and explored it. But can't seem to figure out a way where it really makes sense for us.

Jay McCanless -- Wedbush Securities -- Analyst

Thanks for taking my questions.

Operator

This concludes our question-and-answer session. And I would like to turn the conference back over to Steve Hilton for any closing remarks.

Steven J. Hilton -- Chairman & Chief Executive Officer

Thank you very much for your participation in our first quarter earnings call and we look forward to speaking with you again here over the summer, when we conclude our second quarter. Thank you very much. Have a great day.

Operator

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

Duration: 70 minutes

Call participants:

Brent A. Anderson -- Vice President, Investor Relations

Steven J. Hilton -- Chairman & Chief Executive Officer

Phillippe Lord -- Executive Vice President and Chief Operating Officer

Hilla Sferruzza -- Chief Financial Officer & Executive Vice President

Alan Ratner -- Zelman & Associates -- Analyst

John Lovallo -- BofA Merrill Lynch -- Analyst

Paul Przybylski -- Wells Fargo -- Analyst

Nishu Sood -- Deutsche Bank -- Analyst

Scott Schreier -- Citi -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Alex Barron -- Housing Research Center -- Analyst

Elad Hillman -- JPMorgan -- Analyst

Carl Reichardt -- BTIG, LLC -- Analyst

Ryan Tomasello -- KBW -- Analyst

Susan Maklari -- Credit Suisse -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

More MTH 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.