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MDC Holdings Inc  (NYSE:MDC)
Q1 2019 Earnings Call
April 30, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the M.D.C. Holdings 2019 First Quarter Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Derek Kimmerle, Director of SEC Reporting. Please go ahead.

Derek Kimmerle -- Director of SEC Reporting

Thank you. Good afternoon, ladies and gentlemen, and welcome to M.D.C. Holdings 2019 first quarter earnings conference call. On the call with me today, I have Larry Mizel, Chairman and Chief Executive Officer; and Bob Martin, Chief Financial Officer. At this time all participants are in a listen-only mode. After finishing our prepared remarks. We will conduct a question-and-answer session at which time we request that participants limit themselves to one question and one follow-up question. Please note that this conference is being recorded and will be available for replay. For information on how to access the replay, please visit our website at mdcholdings.com.

Before turning the call over to Larry, it should be noted that certain statements made during this conference call, including those related to MDC's business, financial condition, results of operation, cash flows, strategies and prospects, and responses to questions may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements involve known and unknown risks, uncertainties and other factors that may cause the company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements.

These and other factors that could impact the company's actual performance are set forth in the company's first quarter 2019 Form 10-K, which was filed with the SEC earlier today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides.

And now I will turn the call over to Mr. Mizel for his opening remarks.

Larry A. Mizel -- Chairman and Chief Executive Officer

Good afternoon, and thank you for joining us today as we go over our results for the first quarter of 2019 and provide an update on our business. MDC reported another strong quarter of profitability to start the year, generating net income of $40.6 million, or $0.64 per share.

Home sale revenues grew 7% year-over-year on similar increase in new home deliveries even though the number of homes in our backlog to start the quarter was down by 7%. Homebuilding gross margin expanded 70 basis points over the prior year and net new orders increased 3% with a healthy absorption pace of 3.75 homes per community per month.

We believe that these results provide further validation of our shift to a more affordable product and our adherence to a build-to-order business model. In general, the new home market improved in the first quarter of 2019 following a period of more modest demand to the end of 2018.

Part of this improvement can be attributed to the normal seasonality associated with our business. Another contributing factor was the decline in mortgage rates, which eased affordability concerns in some high cost markets. Lower rates combined with lower price points associated with our more affordable home collections resulted in a compelling value proposition for many of our buyers.

This provided a welcome tailwind for our sales effort complementing the continuing positive impact of other important economic factors such as low unemployment and strong consumer confidence. Sales activity in the quarter was consistent across our three segments.

With each posting average absorption rates exceeding 3.5 net orders per community per month. Our East segment produced the best order result in the term above absorption pace and year-over-year growth. This was driven by particularly strong results in our Florida markets and healthy demand for our more affordable product in this segment.

Additionally, orders in each of our segments got a boost from an increased average activity count in the quarter. We believe that increased community count should continue to drive growth opportunities for the remainder of the spring as we ended the quarter with active communities 15% higher than a year ago.

The order activity we generated in the quarter came without excessive use of incentives. As evidenced by a gross profit margin in our backlog to end the quarter that is only slightly lower than the 18.9 gross margins we realize on closings during the quarter.

The consistency of these margins can be attributed to our build order business model which lessens the need to use incentives when demand softens. It also allows us to capture additional higher margin revenue through options and upgrades at our home galleries.

We believe that focusing our invested capital unsold homes rather than on specs is more risk adverse way of doing business and produces better more consistent returns over the long run. In summary, I'm very pleased with the results this quarter.

We produce year-over-year growth and revenues. Pre-tax income and orders despite an uncertain demand environment at the beginning of the year. We expanded our homebuilding gross margins and grew community counts by 15%. We continue to sell homes at a healthy rate. Thanks to our increased focus on more affordable product.

Our emphasis on design and customization and our commitment to excellent customer service with a strong growth profile, a healthy balance sheet and the highest dividend pay out in the industry. We believe MDC is well-positioned for the future.

Now I'd like to turn the call over to Bob who will provide more detail on the results from the quarter.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Thanks, Larry, and good afternoon, everyone. Our consolidated pre-tax income for the first quarter increased by 10% year-over-year to $55.6 million.

Homebuilding pre-tax income for the 2019 first quarter was up only slightly year-over-year to $41.1 million as an increase in gross profit was mostly offset by higher selling, general and administrative costs. However, financial services pre-tax income increased by 44% year-over-year to $14.6 million

The increase was due mostly to a $4.8 million gain on marketable equity securities for the quarter compared to a $1.2 million loss on marketable equity securities for the first quarter of 2018. Net income for the 2019 first quarter improved by 5% to $40.6 million or $0.64 per diluted share.

Our tax rate increased from 23.3% for the 2018 first quarter to 27.1% for the 2019 first quarter. The year-over-year increase was mostly attributable to energy tax credits, which provided a benefit to us last year, but not this year.

The 27.1% rate was above the estimated 24% to 26% range we had provided during our last earnings cycle primarily due to additional tax expense on stock options that were exercised during the quarter.

Our home sale revenues for the 2019 first quarter were up 7% year-over-year to $647.3 million due entirely to a 7% increase in the number of homes delivered. Our backlog conversion rate was 46%, which was above the expected range for Q1 that we discussed in our previous call and higher than the 40% achieved a year ago.

The improvement in backlog conversion was aided by better cycle times, which were achieved in part due to a higher mix of affordable product. For the first quarter of 2019, 52% of our closings came from product lines we characterize as our more affordable offerings as compared with 35% a year ago. In our mountain segment, cycle times also improved as a result of the vendor related product defect issue in Colorado that negatively impacted cycle times for those homes delivered in the first half of 2018.

On the other hand cycle times in our West segment were negatively impacted by our Arizona markets due to labor constraints driven by strong new home demand. Backlog conversion for the quarter was also helped by a significant year-over-year increase in the number of spec homes we sold and closed during the quarter.

Looking forward to the second quarter we are targeting a backlog conversion rate in the 41% to 43% range compared to the 40% backlog conversion rate we achieved in the second quarter of 2018. Note, that our average selling price of $476,600 for the 2019 first quarter was virtually unchanged from the same quarter a year ago.

It should also be noted that the average selling price for closed homes in the 2019 second quarter of almost $496,000 was the highest in our company's history and was impacted by a greater proportion of our closings coming from some of our highest price communities in Southern California.

And so for the 2019 second quarter we expect a year-over-year decrease in average selling price somewhere in the mid single-digits. Our gross margin from home sales was up 70 basis points year-over-year to 18.9%. This increase was driven primarily by our West segment. While our mountain segment experienced a small year-over-year decrease in their gross margin from home sales.

They continue to have the highest absolute level overall. Both Florida and the Mid-Atlantic experienced increases in gross margin from home sales, but a shift in mix between those two areas resulted in the small year-over- year decrease in our East segment. Our gross margin and backlog to end the quarter remained healthy at a level just slightly below the 2019 first quarter gross margin of 18.9%.

However it should be noted that the gross margin level we actually realized in future periods could be impacted by cost increases, cancellations, price or incentive changes, impairments, reserve adjustments and other factors. Our total dollar SG&A expense for the 2019 first quarter was up $11 million from the 2018 first quarter.

The increase is mostly due to a $6.9 million increase in general and administrative expense to $42.6 million driven by higher average headcount and a $3 million of additional stock-based compensation expense from performance based stock option awards that were granted in 2016 and 2017.

We currently expect second quarter general and administrative expense to be similar to the $42.6 million incurred in the first quarter based on the information we have today. Unexpected charges related to accruals or other items could cause the actual results to differ from this estimate.

Additionally, our marketing expenses increased by $2.7 million over the prior year caused by additional costs incurred to open and staff our 15% year-over-year increase in active subdivision count. Of the $18.3 million of expense incurred in the first quarter about $4 million was variable with closings, the remaining $14.3 million should be relatively constant in the second quarter, though it is subject to some variability based on the timing of expenses related to new community openings.

Finally, our commission expense for the quarter increased by $1.4 million over the prior year, but this was entirely related to the increase we saw in home sale revenues. The dollar value of our net orders decreased 1% year-over-year to $851.4 million driven by a 4% decrease in our average selling price that was largely offset by a 3% increase in unit net orders.

The demand for our more affordable product lines remains strong during the first quarter of 2019, accounting for 60% of net new orders compared to 44% a year ago. This increase was largely attributable for the continued success of our seasons collection, which accounted for 36% of our net new orders in the 2019 first quarter.

The increased prominence of our more affordable product lines across most of our markets contributed to the year-over-year decrease in the average price of our net orders. Additionally, we saw a shift in the mix of our net orders to Florida, which is the state in our operations with the lowest average selling price.

Our monthly absorption rate was a healthy 3.75 for the quarter though it was down 11% percent from the same quarter a year ago. However, this decrease was more than offset by a 15% increase in our average active subdivision count.

We ended the quarter with an estimated sales value for our homes in backlog of $1.65 billion, which was down 12% year-over-year. The decrease was driven by a lower number of homes in backlog as well as a decrease in the average selling price of those homes.

Active subdivision count was at 178 at the end of the 2019 first quarter up 15% from 155 a year ago. We saw an increased number of active subdivisions across each segment with the West experiencing the largest increase. Oregon our newest market finished the quarter with two active communities compared with none a year ago.

Looking at the graph on the right the number of soon to be active communities exceeded the number of soon to be inactive for the third consecutive quarter with 10 more communities soon to be active versus soon to be inactive at March 31st. This favorable dynamic gives us confidence that we can continue to drive year-over-year growth in our subdivision count based on the progress we have already made.

We are on track to have another year of community count growth of 10% or greater. For the 2019 first quarter we acquired 1,417 lots for roughly $90 million with an additional $77 million to spend on development costs.

Approximately 60% of the lofts acquired in the first quarter were finished lots and about 60% were lots intended for our more affordable homes. 2019 first quarter land acquisition spend was notably less than both the 2018 fourth quarter and the 2018 first quarter. As we exercise some caution after seeing slower home sales activity late in 2018.

However we expect to see an increase in activity from the first to the second quarter of 2019, given the solid level of sales activity we saw to start the spring selling season. Even with the relative low in acquisition activity at the end of that quarter we controlled 22,887 lots up 7% year-over-year about 28% of those lots were controlled with an option.

Net homebuilding debt to capital was only 23.3% at the end of the first quarter flat from a year ago and clearly demonstrating our firm commitment to maintaining a strong balance sheet. Furthermore, our liquidity to end the 2019 first quarter was up 27% year-over-year to $1.49 billion providing us with significant resources to fund continued growth.

With that I will now turn the call back to the operator for a question-and-answer session.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session (Operator Instructions) The first question will be from John Lovallo with Bank of America. Please go ahead.

John Lovallo -- Bank of America -- Analyst

Hey, guys. Thank you for taking my questions. The first one, Bob, I think you mentioned that the G&A component of SG&A was up about 70 bps year-over-year and stock comp, I believe, was up about 3 million, I think, that's something like 40 bps and then you mentioned headcount. The first question is, does the lease expense get captured in there as well. And I think you mentioned that this portion of SG&A should remain fairly stable in 2Q. Is that correct?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

That's right. It was $7 million increase year-over-year and what you mentioned is correct, with regard to the lease expense, yes, that does continue to go through. To this point we're finding it's fairly consistent even with the accounting change that we had this quarter. So that really doesn't provide much of a difference. Year-over-year versus the old accounting and, yes, the $42.6 million of G&A expense incurred in the first quarter. I think is a reasonable run rate to use in the second quarter as we move forward here based upon what we know now.

John Lovallo -- Bank of America -- Analyst

Okay. And then I guess moving on to the Oregon market. It took an impairment last quarter, just kind of getting things ramped up there. Just any update on that market and how you guys are feeling about the operations there?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes, after recognizing that impairment, I think, we've seen some really good things. We've opened up a few more communities that we have two active, but we have others behind that. In fact when you look at that soon to be active versus soon to be inactive dynamic, I think, we have two more soon to be active than inactive. So, we see that active community count growing in Oregon. So, we're starting to get our feet under us and some real operations there. And so we feel positive about what we're doing in that market.

John Lovallo -- Bank of America -- Analyst

Okay. Thanks, guys.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Thank you.

Operator

The next question will be from Nishu Sood with Deutsche Bank.

Timothy Daley -- Deutsche Bank -- Analyst

Hi, thanks. This is actually Tim Daley on for Nishu. So, my first question is regarding gross margin. So, gross margins came in line with the gross margin and backlog at the end of the quarter that you guided to. So, just curious as to what kind of what was the gross margin profile on the specs that were delivered in the quarter versus the build order closings and just kind of on a comment that I think you mentioned that build order closings tend to have a bit of a tailwind in margin due to option and upgrade premiums. So just curious as to kind of the differential between the spec margins that were delivered in the quarter and build order if you could kind of maybe quantify some numbers around that for us.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes, I think, the differential was about 300 basis points in dirt versus spec with spec being lower of course. That was also true in Q4. If you go back to Q3, they were roughly even, the dirt margins versus spec margins. So that is kind of a Q4 and Q1 phenomenon thus far, and I think we have really seen that of course as a result of the decrease in orders we saw in Q4 and more competition with that spec inventory.

Timothy Daley -- Deutsche Bank -- Analyst

All right. Understood. And then I guess just kind of following onto that with the second question is the finished specs this quarter were only up 3% year-over-year after being up substantially more on a year-over-year basis than the year last in 2018. So, just curious as to, is there kind of maybe some potential upside to that gross margin and backlog given that just from the inventory that you guys have on the ground, there might be, I guess, less closings from spec in the next quarter relative to what we saw this quarter?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

It's possible but then again we don't have those additional specs available for deliveries. So, there would kind of be an offset on revenue, but you're right, 27% of our orders in Q1 came from specs and a year ago that number was more like 20%. So we definitely saw kind of a bump in our activity due in our closings due to those specs that we're able to sell and close during the quarter.

Timothy Daley -- Deutsche Bank -- Analyst

All right. Understood. Thanks for the time.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Sure. Thanks.

Operator

The next question will be from Michael Rehaut with JPMorgan. Please go ahead.

Michael Rehaut -- JPMorgan -- Analyst

Hi. Good afternoon. Thanks for taking my question. First, Bob, I was hoping to circle back to guidance that you gave. I belief back at your Analyst Day in November and you know obviously with the turbulence that the whole industry had in the second half of the year, you know, I believe on the last call you kind of backed off that guidance as most builders did. But I was hoping, if you could just provide any updated thoughts or comments around to the extent that you want to revisit that guidance if it's too early or not I'm not sure some builders have provided some full year thoughts, some haven't. But you know if you recall that guidance for 2019 with closings growth of 5% to 13% gross margins of 19% or higher, SG&A of 11% or lower, and ASP is down mid single-digit. So I know it's kind of a lot of different metrics there, but you know just any comments around you know revisiting that guidance directionally you know would be helpful?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes, there's not a whole lot for the full year. You know I did comment that we think we're pretty well positioned to hit a 10% plus increase in active subdivision count for the full year just because of what we've seen already in the subdivision growth and what we see in the soon to be active versus soon to be inactive. So, we've got that, I commented on ASP we're flat in Q1, but Q2 is likely to be down by that mid single-digits, nothing further from there. Obviously, the gross margin with still the backlog gross profit margin relatively close to where our closings were that 18.9%. I think that's encouraging on the margin front, but I think we still want to see what happens for the remainder of the sales season before we do too much more there.

Michael Rehaut -- JPMorgan -- Analyst

Okay. Fair enough, I understand. I guess secondly maybe just to drill down a little bit around the gross margins and more around incentive themselves as being a key driver the guidance or not guidance but the comment around gross margins and backlog being at or slightly less than in the first quarter, obviously, if you guys are doing much more on the build to order versus spec, you're not going to be as influenced by shorter term volatility and incentives related to spec as Larry I believe you pointed out. But at the same time you know some other builders have pointed to a little bit of expected improvement sequentially in gross margin whereas you're looking for a slight decline sequentially. So, I was just trying to get a sense, if that decline expected slight decline to the extent that the backlog gross margin plays out next quarter that's more driven by mix and or if there were indeed you know a little bit of higher incentives or you know if I don't know if there was some cost inflation or higher land cost basis just trying to get a sense of the different drivers of gross margin going forward particularly in the second quarter. That might explain a slightly lower number versus again other builders that are expecting improvement at least over the next quarter or if not for the rest of the year?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Right. And I know some of those other builders have higher spec counts to begin with. So, I guess, that would be based on the presumption that they are able to decrease the incentives and maintain the volume which of course has yet to play out for the full spring selling season.

That said you know keep in mind for our Q1 that comment about 27% of our closings coming from specs versus being closer to 20% in Q4 and 20% percent a year ago. We had a 16% of our closings in Q1 where both sold and closed during the quarter. So, with that higher number of specs in that lower margin that 300 basis point margin differential a year ago that was only about 9%.

And now we've settled down to a lower number of specs. So, you know, I would expect that you don't get quite as much of an influence from specs in Q2. So, that could be a positive thing. But that said I still think we need to take a look and see how demand plays out in Q2 before any of the builders get really excited about it. And that's the best thing that we have to go off of this is what's in our backlog right now.

Michael Rehaut -- JPMorgan -- Analyst

Just lastly around that and I'll hop off. Some people have focused on lumber as a positive driver to gross margins over the next quarter or two. Is that a factor that to the extent that is a factor or a positive factor tailwind in your gross margins and backlog. Are there any other offsetting factors such as mix that could be the reason that we're not seeing any type of improvement as it is right now in terms of your backlog gross margin?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes, there is, we certainly have that element too on homes that we've started in 2019. We've gotten a bump from lumber costs being lower. We do have a mix toward Florida and Arizona. Those tend to be a little bit lower in the gross profit margin spectrum as far as we go. So, there is a little bit of mix on that front, but that's factored into what our backlog gross profit margin is to I should add.

Michael Rehaut -- JPMorgan -- Analyst

Great. Thank you.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Sure. Thanks.

Operator

The next question will be from Stephen Kim with Evercore. Please go ahead.

Stephen Kim -- Evercore -- Analyst

Yes, thanks very much, guys. Yes, first question, I guess, relates to the land spend which you recorded in the quarter. You mentioned that it was depressed, but that you were looking to pick it back up. I wanted to get a sense for, if you could give some range around what kind of land spend we should expect. Do you think by the end of the year your land spend relative to, let's say, your revenues would be comparable to what you saw last year or is there a dollar value that we might think you might hit by the end of the year something like that?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Without putting out a specific number, I think, you could approach around where it was last year. There's a couple of reasons behind that. First of all we're higher on the development spend right now and that will continue for much of this year just based upon land acquisition we already did in 2018. You know the land acquisition piece of it certainly that's dependent upon what we see for demand for the remainder of the spring selling season and into the second half of the year.

But based upon what we've seen in Q1 we see that going up from where we were in Q1 of 2019 and keep in mind that Q1 of 2019 it was probably the lowest level we've seen in about two years. There was a little bit of a pullback for sure, but a little bit of that was a wait and see until we got a taste of the spring selling season.

Stephen Kim -- Evercore -- Analyst

Got it. So something you know a little bit north of a billion dollars on total land spend wouldn't be out of the realm of what you're thinking, right?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

In terms of total land spend. No, that's not outside the realm.

Stephen Kim -- Evercore -- Analyst

Right. Okay. And then you mentioned that you had sort of deliberately held off on some of your land spend activity due to the softness in the market at the end of last year which obviously makes a lot of sense. I was just curious as to the mechanics around how that decision making happened.

For instance, I was curious as to whether it was the case that land deals, which had passed your feasibility analysis, let's say, earlier in the year. They no longer penciled and that's why you didn't move on them because you lowered your expectations for the future outcomes within that on the project that you would build on that land or did they actually still pencil and you just decided not to act on those anyway basically which are the two would you say better characterizes the projects that you decided not to buy?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

There might have been a little bit of both, I think, with reduced absorption rates some of them were a little bit a little bit bigger than we wanted them to be. We weren't wouldn't be able to absorp as quick as we originally thought. Just given what we saw in Q4, if that had persisted kind of that 20% year-over-year decline in absorption rates that we saw in Q4. So, I think, there were certainly some of that. And then just some straight up caution as well just trying to make sure that we knew where the market was before we moved toward.

Stephen Kim -- Evercore -- Analyst

Got it. And then as you look across that competitive landscape with respect to land acquisition would you say that because of the little scare that we had in the back half of land of last year that you're actually able to find a little bit more wiggle room on the part of land sellers or is it or has that really not been the case and you're just able to make the deals pencil because you're able to assume somewhat higher absorption levels than you were in fourth quarter something more akin to what you had in mind, let's say, mid-year of last year.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

You know, I think, the land sellers see some of the same things that we've seen and they're willing to be more flexible on terms especially to make it something that we can continue to move forward with. I wouldn't go so far as to say it's outright decreases in land prices because I don't think we've seen that commensurate decrease in home prices other than a little bit of extra incentivizing in Q4 and Q1 on especially on the speculative inventory. So, it's more on the terms than anything.

Stephen Kim -- Evercore -- Analyst

Got it. Great. Well thanks very much guys. I appreciate it.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Okay.

Operator

The next question will be from Stephen East with Wells Fargo. Please go ahead.

Paul Przybylski -- Wells Fargo -- Analyst

Thank you. This is Paul Przybylski on for Stephen. I guess first question goes back to the margin, Bob, is there any way you could give us you know the margin profile on say your entry level communities are more affordable type stuff that you would open in the last quarter or so versus some of the more legacy stuff that has been around for maybe a year or more?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

You know it's -- I don't have that exactly like you put it. I will say that the differential between the entry level has diminished kind of the spread between our traditional product and our affordable product simply because we've rolled it out to more areas. I'd mentioned to Michael earlier about the lower margin profile in Phoenix and Florida and that's where we've gotten a lot of sales especially in Florida.

So, naturally it tends to trend a little bit lower, a little bit closer to the traditional product. And for a long time, I've warned a little bit that even though going back several quarters. We've seen as much of a -- as a 200 basis point differential between the affordable and other product that had some risk of coming in just because we see a lot of people who are doing the affordable product.

Now all that said what we're doing is a little bit unique in that we have built to order affordable product which is something that is not common in our space.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. And then do you have any comments on how April demand has been so far?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

April demand has been good. I would expect April to be up year-over-year by as much as or more than the 3% we saw for Q1.

Paul Przybylski -- Wells Fargo -- Analyst

Okay, great. And then do you have any color on California and the various geographies there and their performance and if it's moving in the right direction?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes, I think, they are more expensive, the coastal areas have been tougher. I think that's well documented with a lot of builders. I think the more affordable is still doing well. Northern California for us is still doing well. So, really the biggest pieces is coastal, higher price points.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. Thank you. I appreciate it.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Sure. Thanks.

Operator

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

Jay McCanless -- Wedbush Securities -- Analyst

Hey. Thanks for taking my questions. The first one I wanted to ask about is based on the numbers, Bob, you gave earlier about the percentage of affordable homes and your closings and your orders. It looks like orders in the non-affordable stuff are down about 27% and closings were down about 21% assuming that I've got my math right. Is that a function of just lower demand across the board or should we think about a reduction in traditional community count as impacting those numbers?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I mean certainly most of our land acquisition efforts 60% of the lots acquired in Q1 for example have gone toward that more affordable product. So, there definitely is a shift in mix. You know I don't think necessarily a first time move up product we're looking to diminish that significantly some of the more expensive stuff.

I think certainly has been diminished the second time move up, but the other thing to keep in mind is our affordable product. It spans a lot of different things. We've talked about urban duplexes, which is a two unit building. We've talked about seasons in Colorado we built that without a basement, but landmark as well that could meet the needs of a first time buyer or a move up buyer. So there is a little bit of movement there. But certainly we're looking to build upon our expertise kind of the move up product, but a lot of our dollars right now are going toward the affordable product lines to make that happen.

Jay McCanless -- Wedbush Securities -- Analyst

And then when we think about the acceleration from February to March in the order comp. I'm assuming that's about a 4 6, 4 7 for March. And did you see an improvement in demand in both in affordable as well as your more traditional second move up in luxury or was it all focused on the affordable product as you move from February to March.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I don't know if I have it exactly like that, it seemed like it was both our traditional and our affordable.

Jay McCanless -- Wedbush Securities -- Analyst

Okay. And then one other quick question just in terms of co-broker fees could you talk about how much all been paying on that and how it compares to last year's levels?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

You know we've been pretty consistent in that. Of course we don't pay co-broker on every deal, but our percentage is pretty high. I think it's about 72% and that's about the same as it was last year you know and typically it can vary by market, but you know roughly 3% is a good rule of thumb.

Jay McCanless -- Wedbush Securities -- Analyst

Okay. Right. Thanks for taking my questions.

Operator

The next question will be from Ivy Zelman with Zelman & Associates. Please go ahead.

Ivy Zelman -- Zelman & Associates -- Analyst

Good afternoon. Actually this question is for Larry. Assuming, Larry, you'll answer it, but we'd like to get your perspective on where, I think, it was Bob or Larry laughing. But given what we're late in the economic cycle where are we in the housing cycle.

Larry A. Mizel -- Chairman and Chief Executive Officer

Why are you picking on me?

Ivy Zelman -- Zelman & Associates -- Analyst

Never, Larry, never.

Larry A. Mizel -- Chairman and Chief Executive Officer

I think, I don't think we're late in the housing cycle. I think that what we've found is a sweet spot that many of the other builders are moving toward, which is affordability, and look as you see inflation becoming more deflationary as to numbers you see that affordability becomes even more interesting as we saw the fabulous GDP growth that was announced.

So, you've got strength, but without inflation. And you have disposable income kind of balancing out. And I think, Ivy, that the affordable housing market has good legs and a very fine outlook. The products of higher price points in different parts of the country much higher than our average sales price are having more challenges.

So I'm very optimistic on where we are and where we're going. And I think other builders are picking it up. The one thing that you continue to hear from us is, we restrict our specs is the minimum that are created really out of fall out of the backlog.

And it's proven to be a good strategy. And we allow people to personalize their home even in the affordable market we have a personalization package. And not many other builders are willing to do that. They're going after the high volume spec you get what we offer. And we're going after the affordable and we allow you the opportunity to select what you really want.

Ivy Zelman -- Zelman & Associates -- Analyst

So, I absolutely agree with lot of what you said and I think one of the things that we're seeing some of the other builders do which is important just announced the tolls and the business certainly (inaudible) is getting into the rental business. Do you see an opportunity in single family that you can see expanding you know seasons in a rental product offering or selling seasons product to single family rental operators given to those people that have a difficulty affording a home and home ownership today?

Larry A. Mizel -- Chairman and Chief Executive Officer

We think it's the bad business to sell rentals in the markets in the subdivisions or the areas that we're in. We certainly would not knowingly do it because when you drive down the street and the grass is green except for a few brown ones. The way people take care of their homes if their rentals are slightly different that if they own it and I know that there is a demand for homes that are rented out that we do not intend to knowingly permitted.

Ivy Zelman -- Zelman & Associates -- Analyst

Got it. Well I appreciate your thoughts, Larry. Thank you very much. Good quarter.

Larry A. Mizel -- Chairman and Chief Executive Officer

Thank you, Ivy.

Operator

The next question will be from Alex Barron with Housing Research Center. Please go ahead.

Alex Barron -- Housing Research Center -- Analyst

Thank you. I wanted to see if you could comment on roughly what percentage of your orders and deliveries are coming from seasons right now versus where they are a year ago and what's your ultimate target for that?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I think on the orders it was 36% per seasons. The year ago, once it was right around 20% percent, for closings, it was 26% current quarter and I think 13% a year ago. Hold on one second I'll get you that comp number on the sales front. Yes, so 19% percent that was off 5%. 19% in Q1 of 2018 per seasons. Final results.

Alex Barron -- Housing Research Center -- Analyst

And where do you see kind of your -- where are you guys targeting that to go. Was it like 50% or more or less than that?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

I think we want the affordable offering to be in the 60% plus range. So I could certainly see the seasons moving a little bit higher. You know maybe it's between 40% and 50%.

Alex Barron -- Housing Research Center -- Analyst

So, is it reasonable to expect the average sales price to keep trending a little bit lower in the next few quarters?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes.

Alex Barron -- Housing Research Center -- Analyst

Okay, great. Well best of luck. Thank you.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Thank you.

Operator

Our next question comes from Buck Horne with Raymond James. Please go ahead.

Buck Horne -- Raymond James -- Analyst

Hey, thanks. Good afternoon. I wanted to ask a little bit on potential M&A thoughts or activity around that one of your larger competitors made a move in Las Vegas recently to shore up some market share positions. The Southwest is obviously booming, obviously, you're having a lot of strength in Florida as well how do you think about the need or the possibility of some sort of private builder acquisition or other land acquisition to shore up your market share in some of these growth areas?

Larry A. Mizel -- Chairman and Chief Executive Officer

We've found over all these years. We've really only acquire assets not entities operating entities because of the contingent liabilities and the legacy problems. And we find that we're able to execute our plan and have the growth we do through natural growth in an increasing market share in our existing markets. We have gone into a few new markets over the last two or three years and it seems to be working out well, but we don't see M&A as, in the sense, that it's used today as something that we're pursuing.

Buck Horne -- Raymond James -- Analyst

Okay. That's helpful. And one last one just if you have it handy. If you have the percentage of incentives or sales concessions that was used as a call it at a percentage of ASP if you have it. And just how did that trend throughout the quarter if you can characterize that?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Are you talking about closings?

Buck Horne -- Raymond James -- Analyst

Probably looking either closings or orders or both. Just trying to get a flavor for how you were you know how the level of discounting trended throughout the quarter?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Yes, I think, on orders, I'm sorry, in closings we were at about 5.1%. So that's up about 120 basis points year-over-year and 70 basis points sequentially.

Buck Horne -- Raymond James -- Analyst

Okay. All right.

Operator

(Operator Instructions) The next question is a follow-up from Michael Rehaut with JPMorgan. Please go ahead.

Michael Rehaut -- JPMorgan -- Analyst

Thanks. I just wanted to make sure I heard it right around your comments Bob on April orders, I believe, you said that you would expect them to be up as much or more than 3Qs 3%. Is that right?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Correct.

Michael Rehaut -- JPMorgan -- Analyst

And so you know if I'm to extrapolate that you know particularly from a community count standpoint. You know still should be probably up around you know that you know roughly 10% if you kind of work off of your current number and hold pace on the 10% expect that are better growth by the end of the year.

It would still point to some year-over-year you know decent year-over-year decline 5%, 10%, let's say, on sales pace. Historically your sales pace sequentially was roughly flat from 2Q to 1Q. You have the exception last year, but it's typically it's been a little bit flat. So, just want to make sure if I'm thinking about that right from a sales pace perspective that you know you're still perhaps not fully back to normalized trends or if there's anything else going on there?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

That was a lot of math and a lot of extrapolating. I'm not sure I would extrapolate it out to the full quarter at this point I think it's positive that we continue to have year-over-year improvement in orders. I mean obviously the day is not done for today still in April. So, we don't have the final count there yet. So, I don't want you to read too much into that number right now. I just wanted to give you directionally just a little bit of a flavor that things are still going pretty good.

Michael Rehaut -- JPMorgan -- Analyst

Okay. I appreciate that. And then you also said incentives were again just making sure I heard it right 5.1% of closings up 120 bps year-over-year and 70 bps sequentially.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

5.1% of gross revenue for closings, yeah.

Michael Rehaut -- JPMorgan -- Analyst

Gross revenue?

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Comparison.

Michael Rehaut -- JPMorgan -- Analyst

5.1% of closings revenue. Is that? Okay.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Right.

Michael Rehaut -- JPMorgan -- Analyst

Right. Okay. Perfect. Thank you.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Gross revenue for the incentives. Incentives or reduction to revenue.

Michael Rehaut -- JPMorgan -- Analyst

Right. Great. Thank you.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Sure. Thanks.

Operator

Ladies and gentlemen this concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin for any closing remarks.

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

Thank you very much for joining us this afternoon on the call, and we look forward to speaking with you again following the conclusion of our second quarter.

Operator

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

Duration: 53 minutes

Call participants:

Derek Kimmerle -- Director of SEC Reporting

Larry A. Mizel -- Chairman and Chief Executive Officer

Robert N. Martin -- Senior Vice President, Chief Financial Officer and Principal Accounting Officer

John Lovallo -- Bank of America -- Analyst

Timothy Daley -- Deutsche Bank -- Analyst

Michael Rehaut -- JPMorgan -- Analyst

Stephen Kim -- Evercore -- Analyst

Paul Przybylski -- Wells Fargo -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Ivy Zelman -- Zelman & Associates -- Analyst

Alex Barron -- Housing Research Center -- Analyst

Buck Horne -- Raymond James -- Analyst

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