Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Taylor Morrison Home (NYSE:TMHC)
Q1 2019 Earnings Call
May. 01, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, welcome to Taylor Morrison first-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference call is being recorded. I'd now like to introduce Mr. Jason Lenderman, vice president, investor relations and treasury.

Jason Lenderman -- Vice president, Investor Relations and Treasury

Thank you, and welcome, everyone, to Taylor Morrison's first-quarter 2019 earnings conference call. With me today are Sheryl Palmer, chairman and chief executive officer; and Dave Cone, executive vice president and chief financial officer. Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results, along with our guidance, then Sheryl will conclude with the outlook for the business, after which we'll be happy to take your questions.

Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session, includes forward-looking statements that are subject to the safe harbor statement for forward-looking information that you'll find in today's news release. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission. And we do not undertake any obligation to update our forward-looking statements.

Now, let me turn the call over to Sheryl Palmer.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you, Jason. We appreciate you joining us this morning as we present Taylor Morrison's results for the first quarter of 2019. I'll start today by discussing our results for the quarter, and then I'll give you my best insight into what we think that means for the broader homebuilding environment before turning the call over to Dave to review the details of the financial results. Getting right to it, I'm delighted to share that we exceeded our expectations in our operating metrics for the quarter, including orders, closings, homebuilding gross margin and SG&A, which produced a strong EPS result of $0.46.

We ended the quarter with 2,615 net orders on an average community count of 372, leading to an average sales pace of just over 2,300. Given the Q4 environment, it's important to look at how that sales pace is built within the quarter. January saw a slight sequential pickup in pace from December, but we really started to seeing traction in February and then continued to see a pickup in March with the [ 2A ] pace. It's also worth mentioning that our cancellation rate for the quarter improved nearly 700 basis points sequentially from Q4, and a 13.3% in the first quarter was consistent with our historical norms.

Lastly, on sales, we saw the market stress continue into April and expect that our pace will generally be in line with our historic transitions from March to April as we see some slight month-over-month moderation. Closings for the quarter came in at 1,938, which is a 25% higher result than last year and slightly above the high end of our guidance for the quarter. We'll take some time at end of the call to address specific insights into each of the markets, but I would say that our strength in closings was primarily driven by our our three California divisions: Phoenix, Denver, Houston and both divisions in the Carolinas. Home closings gross margin, inclusive of capitalized interest, was 18.2%, which was also above the high end of our guidance range for the quarter with some favorable mix impacts on closings previously expected in Q2.

EBT margin was 7.4% for the quarter or 7.8% when adjusted for AV transaction expenses in the quarter. As our integration of AV Homes advances, we are highly focused on gaining the efficiencies needed to drive our margins up toward our historical averages. When we look into the synergies realized so far and look at the efficiencies on a project-by-project basis, we are still very confident with the updated synergy run rate we gave last quarter of $40 million. We've talked openly over the last couple of years about the benefits in gaining overall scale as a business, which we think, combined with our highly concentrated first-time, first-time move up and 55-plus segments, improves our competitive positioning in each of the markets where we build and alternately leads to improved profitability and cash flow generation.

In the first quarter, these three segments represented nearly 90% of our closings, approximately 500 basis points of improvement from the prior-year quarter. We've executed on their strategy with four acquisitions in the last four years. The largest obviously being AV at the end of last year, which really complemented our affordable first-time-in-55-plus-buyer business. We're pleased to see this strategy starting to bear fruit in our operating results as our Q1 sales in closings all-time first-quarter highs for the company by a pretty wide margin.

What's more, we're equally pleased to see that so quickly after the AV acquisition, we achieved the first-quarter low on our SG&A as a percent of homebuilding revenue at 11.5%. Now that I've highlighted Taylor Morrison's results for the quarter, I'd like to take a step back and reflect on where we think we are in the market and what we're seeing from a big-picture perspective. As we talked about on our fourth-quarter call, there were a number of factors that had uniquely come together in the back half of 2018 that led potential buyers to take more of a wait-and-see approach than they had in recent years. Some of those factors began to alleviate in Q1.

The two that probably received the most attention are the recent change in trajectory of mortgage rates and the overall direction of the stock market. The 10-year treasury rate has dropped pretty steadily since November of last year and now sits about 2.5%. And while mortgage rates are always tied to the 10-year treasury rate, we've seen similar downward trends with that metric as well. Buyers were being quoted more than 5% in November of last year.

And at the time of our last call in February, 30-year fixed rate has fallen to around 4.5%. Since then, they've dropped even further to just over 4%, representing a nice tailwind for the industry. In fact, as we calculate the annual mortgage payment savings for our average customer, they would save around $2,400 per year compared to the same mortgage closing locked in November or December of last year. In order to maximize our conversion opportunities in the slower rate environment, we converted our successful two-one rate buydown that we spoke about last quarter into a nationally marketed program that allows for permanent rate buydown at 3.75%.

We've seen tremendous success with these programs driving traffic into our communities. The traffic is up more than 24% year over year and perhaps equally or more important wet traffic, which is a leading indicator for the business is at 32% year over year. Benefiting from the added traffic, we saw reductions in sales incentives from Q1 2018 driving part of our home margin upside in the quarter. We believe that also aiding our traffic is the stock market momentum over the last quarter.

The Dow Industrial Average hit a 52-week low in mid-December. And as I'm sure everyone on this call knows, we've seen a pretty steady increase since that point, recently closing at an all-time high. Some markets have consumers that are particularly sensitive to the stock market volatility, including tech employees in Northern California that have higher percentages of personnel tied up in stock-based compensation and from 55-plus buyers in Florida. We believe that roughly 20% stock market increase we've seen over the last few months has provided positive impact in the consumer's overall financial psyche and has created a renewed energy on the sales fore.

We believe the overall economy remains on steady footing. Unemployment remains at historical lows. Job-creation levels are healthy, and population and household formation growth continued to be solid. As we've discussed over the last many quarters, our conviction on the healthy prospects for homebuilding is strongly linked to most markets remaining underbuild by nearly 25%.

In addition, the demographic tailwinds appear favorable with strong boomer migration rates from the Midwest and east to the Sunbelt states and the largest group of millennials entering lifestyle stages that indicate preferences for single-family ownership. Before I turn the call over to Dave, I'd like to quickly touch on a mortgage topic that has been getting some attention as of late. The announcement from the FHA on tightening the total mortgage score card to address the overall health of their book. The FHA have publicly stated its belief that it could impact 4% to 5% of FHA in certain mortgages annually.

And as you can imagine, there has an even reduced impact on Taylor Morrison buyers, given our smaller mix of FHA loans originated and the higher relative credit quality of those FHA buyers we do have. In Q1, 6% of Taylor Morrison home lendings closed mortgages were FHA, which represents under 3% of our total closings. When FHA announced these changes, TMHF reviewed their loans in process and found less than 1% and multiple factors that may require a manual underwriting. But given the overall quality of the loans, we were able to get them approved under the new guidelines.

No loans have been denied since that change. We appreciate the advantage we have with our in-house financial services team assisting our customers from the very beginning of the buying process, ensuring they have the right finance programs to meet their short- and long-term needs. We pride ourselves on staying at the cutting edge of changes in the mortgage industry, and we'll continue to monitor further developments, but we believe the potential impact from this change is immaterial. Now I'll turn the call over to Dave for the financial review.

Dave Cone -- Executive Vice President and Chief Financial Officer

Thanks, Sheryl, and hello, everyone. For the first quarter, net income was $51 million, and earnings per share was $0.46. Total revenues were $925 million for the quarter, including homebuilding revenues of $900 million. Both of those figures are up about 23% from the same quarter last year.

GAAP home closings gross margin includes the capitalized interest and impact from purchase accounting and mix impact from AV closings was 18.2%. This exceeded our first-quarter guidance as margins on homes sold and closed during the quarter were better than expected due to lower incentives utilized and planned, as well as some benefit from favorable geographic mix. More specifically, we saw a nice strength in margins throughout the west region during the quarter where are all four divisions had year-over-year increases in margin rate. On a total gross-margin basis, we came in at 18.6%.

Moving to financial services. We generated approximately $16 million in revenue for the quarter and just over $5 million in gross profit, equating to a margin rate of 33.2%. As we look at our TMHF buyer, the average FICO score was 752 during the quarter, which is the highest level in several years. We have long sales on our credit quality of Taylor Morrison buyers at every price point, so it's great to see that continuing to increase incrementally.

SG&A as a percent of home closings revenue came in at 11.5%, which represented 40 basis points of leverage when compared to Q1 2018. The addition of AV is allowing us to drive top-line leverage. EBT margin was roughly in line with our results in Q1 of last year when we account for the $4 million in transaction expenses that hit this quarter from the AV acquisition. Income taxes totaled about $17 million for the quarter, representing an effective tax rate of 24.7%.

For the quarter, we spent about $255 million in land purchases and development. At the end of the quarter, we had approximately 55,000 lots owned and controlled. The percentage of lots owned was about 79% with remainder under control. As we discussed during our Q4 call, we expect to decrease that percentage of owned lots back down closer to our historical average.

On average, our land bank has had approximately 5.4 years of supply at quarter end based on a trailing 12 months of closings, including a full-year impact of AV. From a land pipeline perspective, we are almost exclusively focused on securing land for 2021 and beyond. At the end of the quarter, we had 4,835 units in our backlog with a sales value of just under $2.4 billion. Compared to the same time last year, this represents an increase of approximately 10% in both units and the sales value for those units.

In addition, we had 2,117 total specs at quarter end, which includes 561 finished specs. We spoke during our Q4 call about the fact that our spec levels were slightly higher than normal, but that it would position us for a strong Q1 and spring selling season. That has played out well so far with our division selling more than 1,200 gross specs during the quarter, and we are continuing to replace that inventory in line with market demand. From a liquidity perspective, we ended the quarter with more than $676 million in total available liquidity.

$172 million of that liquidity was cash on hand, and the rest is from our $600 million corporate revolver, excluding normal course letters of credit that have been issued against it. At the end of the quarter, we had a drawn balance on the revolver of $35 million and our net debt-to-capital ratio was 44.3%. This is higher than this time last year due to the AV transaction, but we anticipate driving this ratio back down below 40% going forward. During the quarter, we were authorized by of our board of directors to buy back up to $100 million of stock.

In Q1, we acquired 4.3 million shares for about $77 million or an average repurchase price of $17.93. In April, we have acquired an additional 1.4 million shares for just under $27 million through last Friday, the 26th, at an average price of $18.63. This leaves us with approximately $49 million remaining on our current $100 million authorization. This continues to be a key pillar of our capital-allocation strategy, given the attractive returns provided by repurchasing our stock at a discount to the underlying book value per share.

I'll wrap up by sharing our Q2 guidance. For the quarter, we anticipate community count to be flat to slightly down on a sequential basis. Closings for the quarter are planned to be between 2,225 and 2,425. GAAP on closings gross margin inclusive of capitalized interest and purchase accounting is expected to be in the mid- to high 17% range.

Effective tax rate is expected to be about 25%, and the diluted share count is expected to be about 108 million. For the full year, we anticipate closings to be between 9,500 and 10,000. Our community count will be in the 365 to 375 range. Our 2019 absorption pace is expected to be consistent with our 2018 performance.

GAAP home closings gross margin, inclusive of capitalized interest and purchase accounting, is expected to be in the mid- to high 17% range. Our SG&A as a percentage of homebuilding is expected to be in the low to mid-10% range. JV income expected to be between $11 million and $13 million, and we anticipate effective tax rate of about 25%. Land and development spend is expected to be approximately $1.2 billion for the year, and we expect our diluted share count for the year to be around 108 million.

Thanks, and now, I'll turn the call back over to Sheryl.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you, Dave. Before we move to Q&A, I'll spend a few minutes covering the latest with regard to what we're seeing with consumer trend and activity in each of our major market. We mentioned on the last call that our west region had held up well through the slowdown in the fall, particularly in Phoenix and the Bay Area, and the relative momentum continuing throughout the first quarter. Closings in order in all four of our western divisions were up nearly 25%, which led to a cumulative 30% increase in closings for the region.

Dave has already mentioned a strong homebuilding margin performance in each of these four divisions. Although total sales orders were down slightly during the quarter for the region, Phoenix and Southern California both had double-digit increases, but they had a year-over-year decline in sales, primarily due to their company leading pace during Q1 of last year. However, the delivering orders in 2019 consistent with our expectations. The east region had a strong first quarter after experiencing more moderation than others during Q4.

Sales and closings for Q1 were up 14% and 22%, respectively. This strength was driven by Charlotte, Raleigh and North Florida, which has made up of our Orlando and Jacksonville divisions. Although we saw some volatility in the fourth quarter in our Southwest Florida business, we've seen some nice recovery there following the same trajectory, as I mentioned earlier, with month-over-month improvement. Due to a strong 55-plus business, Southwest Florida was able to hold pace with where they where in the first quarter of last year.

In the Central region, sales orders were up about 6%, driven by a strong growth in Austin and Dallas, with Dallas benefiting from the addition of the AV communities. Closings for the region were up almost 26% with Denver, Houston and Dallas being the largest contributors. As mentioned on prior calls, we know we had some work to do on the AV Dallas backlog and rightsizing product and price that are quickly seeing the benefits of the team's strong focus. We've also seen continued strength in Austin where our team continues to maximize the opportunities being presented by the combination of a strong economy and key community positions and desirable submarkets.

So before closing, I'd like to share some more about our approach to addressing environmental, social and governance issues within the broader framework of our business operations. We see tremendous value in examining our performance in this area in order to build long-term sustainable value for our shareholders. That is why on Earth Day, we released our first corporate responsibility report. In it, we share our efforts to incorporate sustainable values into how we operate our business, give back to our communities through volunteer and charitable activities, structure our governance practices, manage our workforce and engage our key stakeholders.

As Taylor Morrison grows and refines its ESG performance metrics and goals, we're committed to consistent transparent communication of our progress to ensure our shareholders have a clear understanding of our company and strategy. A key highlight that further differentiates Taylor Morrison within the industry is the formation of a strategic partnership with the National Wildlife Federation. The sustained organization is advising our land teams on habitat conservation best practices while providing engagement opportunities for team members, customers and our communities all helping to position us in an industry -- as an industry leader in environmental stewardship. I'd like to thank the Taylor Morrison team members across the country for remarkable first quarter.

I have such confidence in their ability to flourish in any environment and now that 2019 will be a year to remember. With that, I'd like to open the call to questions. Operator, please provide our participants with instructions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Michael Rehaut from J.P. Morgan. Please go ahead.

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

Thank you. good morning, everyone. First question I had was just on the longer-term trajectory, as you see it, for Taylor. Obviously, Sheryl you kind of walked through some of the acquisitions on of AV Homes, and it's been a busy few years for you guys.

With that being said, I was interested in if you were to kind of just looking your current footprint today of the opportunity set in front for you. Obviously, you have a lot of competitors out there that have gotten bigger as well. Some of the biggest have gotten bigger or continue to get bigger, in particular. How do you see over the next couple of years, assuming a steady housing market backdrop kind of this slower-growth dynamic that we're in.

How do you see your own organic growth opportunities? I think historically you kind of framed it within a 5% to 10% annual growth rate. I don't know perhaps little bit better at points. But is that the right way to think about it? But just in general, where do you see the opportunities stem from an organic standpoint?

Sheryl Palmer -- Chairman and Chief Executive Officer

Yes. Good question, Michael. I would say there is not anything real new from what we've talked about. The report is we look at the long-term trajectory.

We continue to expect somewhere around mid-single digits. We've talked for quite some time about the importance of scale in the local markets, which is what's driven our strategy with the local market acquisition to continue to build that scale, so we can really be a leader in one talent to kind of first looks at land and making sure we're controlling the ability to get the trade on site and keep them there. We'll continue to look at the organic growth as they've often described in our capital allocation and continue to look at opportunities for acquisitions where we believe they strategically make sense and provide accretive growth to the organization. I think the last thing that would be worth mentioning is the continued focus we have really on our -- excuse me, our approach with the millennials that first-time buyer segment, that professional first-time buyer segment and the 55 plus, both in the affordable 55-plus, as well as the consumer that we've been serving in our more luxurious, active-adult, lifestyle communities.

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

Great. Thank you for that, Sheryl I guess, secondly, perhaps for Dave, but obviously Sheryl weigh in, please, if you have thoughts. Just talking -- question more around the guidance for sales pace or absorption to be roughly flat year over year. Obviously, in the first quarter, you were down.

We have an estimate down roughly 17% in terms of your absorption rate, and it was kind of even across the regions. But from a total company standpoint for the full year, obviously there is a much easier comp in the -- as we get toward the end of the year. But that's one of your smaller-order quarters typically. So I was just wondering if you're going to make up the difference from a year-over-year standpoint, primarily in the fourth quarter, or if you see any kind of more positive growth sooner than that in the second or third quarter even?

Sheryl Palmer -- Chairman and Chief Executive Officer

So as you mentioned, we did have a reduction in pace year over year, but that was quite expected, Michael, and I think that's why it was in line with consensus that we had in some of our strongest compares in first quarter going in the second quarter. So we're very delighted with the first-quarter success, and that has continued through April. I mean, this is write-off probably eight hours all. But it looks like in April, we will have done about a 2.5 pace.

So given the April three and a half weekends with the Easter compared to the five weekends in March, I'm quite delighted with that as well. So first in quarter, we knew we had very difficult comps. I think when you look at pace, you have to look at pace in line with incentives. There are certain communities that we're going to drive pace very hard, continue to work with the incentive and make sure we move through.

And in the others, we're going to protect because from a margin standpoint, that land can't be replaced. When I look at the trajectory kind of the openings and closings for the balance of the year, I actually expect some good strength in new positions offsetting some of the drag of closeout. But our desire will be to make sure that we stay very aggressive from a pace standpoint as we make our way through the year.

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

And obviously that still -- your gross margin trajectory incorporates some of that aggressiveness from an incentive standpoint?

Sheryl Palmer -- Chairman and Chief Executive Officer

Of course.

Dave Cone -- Executive Vice President and Chief Financial Officer

Yes, it does. We're leaving a little bit of room there use incentives that help deliver that pace, and we're very focused on turning the assets and driving returns.

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

Great. Thank you.

Operator

Thank you. Our next question comes from Paul Przybylski from Wells Fargo. Please go ahead.

Paul Przybylski -- Wells Fargo -- Analyst

Thank you. Good morning. I was just wondering in your press release issued, you talked about the segment gaining some momentum. I was wondering if the activity there has extended behind on traditional selling season? And if you're seeing any difference in the performance between the lower price, AV, active-adult communities versus your more traditional Taylor Morrison active-adult communities?

Sheryl Palmer -- Chairman and Chief Executive Officer

No. I think -- and the good news, Paul, is we're actually seeing strength. It was slower as slug, like I mentioned, kind of in the fourth quarter, particularly in Southwest Florida. But we really saw that momentum build in Florida as we started through the first of the year, and we saw that in both the legacy Taylor Morrison communities as well as the AV communities, and that would be at our price points.

I'm quite excited this will be over the course of this year introducing some new active adult and more affordable positions in other parts of the country. But it's a strong focus for the organization because I think you know a high percentage of our overall lots, about a third of our lots will serve that consumer group. And we're just getting going there.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. And then on the AV integration, you mentioned you're still comfortable with the $40 million in synergies. How much of that has been captured so far? And how does that break out between gross margin and SG&A?

Dave Cone -- Executive Vice President and Chief Financial Officer

Yes. So for the full year, our estimate was about two-thirds of that is in overhead, about a third of that is in various other categories: mortgage, insurance, national, rebates. We've captured a lot of the, call it, office overheads. We're seeing that come through now.

That's helping us from an SG&A standpoint. A lot of other stuff will come or we'll call it the remainder of this year, and we should be on an annualized run rate for our $40 million estimate in 2020.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. Great. I appreciate it. Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you, Paul.

Operator

Thank you. Our next question comes from Alan Ratner from Zelman & Associates. Please go ahead.

Alan Ratner -- Zelman and Associates -- Analyst

Hey, good morning. Congrats on a strong quarter. Great to hear the market strengthening here. So high level for you, Sheryl.

I guess the synergy target remaining on track there is very encouraging, but you guys are about eight months into the deal closing now. And I'm just curious if you look back or you kind of dig in there, is there anything on the scale side that the markets may be aware you've seen the greatest increase in scale? Is there anything you've been surprised that as far as the benefits are concerned, maybe not just the tangible synergies, but things like dealing with land sellers, dealing with the trades. Anything you can kind of share for us where you feel like the business has really improved or changed given the increase in scale that you've gotten from the deal.

Sheryl Palmer -- Chairman and Chief Executive Officer

Yes. It's a great question, Alan. And I'll say there is a lot of very positive movement and some to our surprise, but I think we had actually planned for a good part of it. It was just hard to quantify some of that.

For example, we knew that as we scaled up the business, we would rebid on the national. That was for the first we saw come through the national rebates come through the business, very, very quickly. We started on that literally the day we announced the deal. I think the opportunity that we've been pleased with and will continue to, I think, see some more movement is on the local scale And it's not just on the AV synergies, it's about -- it's something else.

Some tangibles have not. But as you think about rebidding our communities, even in the Taylor Morrison legacy business, it's getting the advantage of the cost on the overall scale, not just in the new AV business or maybe we can have them catch up to where our costing was. I think availability of trades and being able to really give the trades some visibility over the next six months, I mean, we've really entered into strong partnerships with our trades across the organization on production planning to allow them to better plan for their business. And I'll tell you that what scale really does matter.

So I think it's really been at the field level, and I think we continue with the strength in the Taylor Morrison culture and the scale of the business, continue to attract some very strong talent. Obviously, we got some wonderful talent in the acquisition within AV. And as we're continuing to scale up, it's allowing us from recruiting standpoint to really go into the market and look at great talent.

Alan Ratner -- Zelman and Associates -- Analyst

Very helpful, Sheryl. And second question, if I could. You mentioned a few of the tailwinds during the quarter that really benefited the business lower rates, stock market. As you look up and down your buyer pool, what would you say was the most evident as far as buyer behavior as a result of these tailwinds? Did you see buyers maybe choosing to do more option and upgrades or buy a bigger house and maybe they could have afforded three, six months ago given the move in rates? Or was it more kind of drawing some of those more marginal buyers into the market that maybe couldn't have qualified or just a little bit worried about devoting such a high percentage of their income to housing?

Sheryl Palmer -- Chairman and Chief Executive Officer

Yes and yes, Alan, really, across the board. I think we saw it really everywhere, and I think that's what made it so nice. Because as we said in the fourth quarter, and sometimes it's better to be lucky, we really believe that this was more of a psychological thing for our buyers as an affordable thing because also macro factors haven't changed. For example, you heard us talk well -- for well over two years now about our buyers' ability to buy a larger house.

And that's really been evidenced through the fact that they could afford our rate on the FHA site at around 300 basis points and on the conventional side around 500 basis points more than what they're qualifying for today. So even though they could afford, there was a lot of other noise in the fourth quarter, be it stock market, be it government shutdowns. All the things that we don't want to talk about anymore, that really kind of drove kind of a psychological impact. So what we've seen is this renewed energy on the sales floor, and certainly, at the most affordable price point, absolutely it puts folks back into the market.

That's a smaller piece of our business because when you look at our first-time buyer, it tends to be -- a smaller percent of that third of the business are the consumers that are really scratching their land homeownership, but it did allow them to get back into the game. And I think it gave more confidence to the professional first-time buyer. But having said that, there is some interesting news stats around millennials giving financial fitting and their growth in income has really allowed them not to have to pull on down-payment assistance and they're in the better job environment. So I think all these factors that are working in our favor in fourth quarter, I think it was exactly the opposite.

But in totality, it's just giving the consumer significant more confidence.

Alan Ratner -- Zelman and Associates -- Analyst

I figured you would say that but very helpful to hear.

Sheryl Palmer -- Chairman and Chief Executive Officer

OK. Thank you.

Operator

Thank you. Our next question comes from Scott Schrier from Citi. Please go ahead.

Scott Schrier -- Citi -- Analyst

Hi. Good morning. Nice to see good a quarter and having the confidence to put out some guidance. I want to ask another question about your comments about some of those savings as a result of the interest rates.

Do you view this as an opportunity in certain markets to push price? Or is it more of a good way to keep the momentum in sales going? We've heard some commentary about a lot of inventory on the ground in certain markets. So if you could speak to that dynamic with respect to some of your markets and demographics, that would be helpful.

Sheryl Palmer -- Chairman and Chief Executive Officer

I think it's a little bit of both, but I would say generally more pace. We were taking some cautious price increases. And I think Dave's number was about 40% of our community.

Dave Cone -- Executive Vice President and Chief Financial Officer

Yes, 40%.

Sheryl Palmer -- Chairman and Chief Executive Officer

Which not real difference than prior quarters, right, Scott? But the difference is how big were those price increases you like to give the consumers and backlog, a little equity there, but they're are small. And if we have to pack moving pace or price, candidly we're going to pivot to pace. But I'd still say that is very much on a community-by-community basis. But there are some communities new to market that we started little lower that we get the momentum rolling and then we start moving some price.

We also have some markets that continue to be very strong like Austin, Phoenix, and we're probably moving price a little bit more in those markets, but still albeit at small levels. So if I had to pick one, I would say pace. But once again, with 40% of the communities getting some price movement, I think that's good.

Scott Schrier -- Citi -- Analyst

Thanks. And I wanted to ask about your gross margin guidance following a strong quarter, which you discussed on your comments, some of the activity out west. Looks like we're going to expect pretty consistent margins throughout the year. And I'm curious if you could talk a little bit about some of the drivers, what types of mix changes do you expect through the year versus what's happening on the cost side and the incentive side?

Dave Cone -- Executive Vice President and Chief Financial Officer

Sure, Scott. I think when we look at the year, some of this is going to be dependent on how the spring season finishes up, so we'll see how that unfolds. But if we look at the drivers, couple of the benefits, obviously we're gaining the benefit from purchase accounting, but that will start to decrease each quarter throughout the year. And we should also see some lower input costs, most notably in lumber and OSB in the second half of the year, just given where pricing has gone or costs have gone on those commodities.

Probably the headwinds for us, we have a little bit of a mixed drag from AV acquisition. That product is generally at an overall lower-margin rate than the legacy and takes about 18 months to normally bring those margin levels up to kind of the company average. We will look at discounting incentives to help drive pace, as Sheryl mentioned. That will be based on market conditions.

And then lastly, certain input costs, things like trade, labor, tariffs, probably some -- little bit of risk there, probably more so on the tariffs. We just -- we anticipate some volatility there, mainly in steel, due to the continued threats of additional tariffs.

Scott Schrier -- Citi -- Analyst

Thanks for that, and good luck.

Operator

Thank you. Our next question comes from Jack Micenko from SIG. Please go ahead.

Jack Micenko -- Susquehanna International Group -- Analyst

So just wanted to start with maybe your spec strategy going forward. Can we first sort of get your spec levels from a year ago? And just share your thoughts on how you're thinking about spec strategy with AV in the mix, especially as we consider one of your peers having a lot more inventory in the ground this year than years prior?

Dave Cone -- Executive Vice President and Chief Financial Officer

Sure. Yes. We look at what we are targeting today, it's about four to five, or sorry, five to six in process in finished specs per community. That's up from where we where probably a year ago, more about four to five.

And that's largely driven by additional AV. That's a little bit higher-spec business for us and we like that. In the first quarter, we ended up with about 5.7 specs, 4.2 of those were in process. One and a half were finished.

So we were pretty successful driving through our spec inventory. In the first quarter, we sold as we mention about 200 spec. We were able to drop that down to roughly 6.3 is what we had but we have in the first quarter. So I think, as we go forward, you're going to see us kind of sit more in that than five to six specs per community range.

Sheryl Palmer -- Chairman and Chief Executive Officer

And I think to your question about the amount of inventory out there. You're absolutely right. As we came into the new year, there were some builders with very heavy inventory, which has guided their behavior through the first quarter. I think generally, that is currently have seen in the marketplace and this is on average.

Builders have really put their dollars to work with inventory And I think we have seen movement in that inventory. But it hasn't been wholesale discounting across new builders. Market actually very community specific on the kinds of pressure that we are saying based on the inventory of some of the larger peers.

Jack Micenko -- Susquehanna International Group -- Analyst

OK. Got it. And just on-the-fly sales guide. Could you just walk us through your assumptions if we were to break that down by legacy Taylor Morrison versus AV, just to get a sense for improvements or pressures there year over year?

Sheryl Palmer -- Chairman and Chief Executive Officer

We actually don't provide it. We are not providing the detail because we went into the two business in the AV has gone and Taylor Morrison. I would say that generally we are working to get the AV to the -- it depends on the markets, such as our legacy TM. I'll look served in the relatively consistently because once again we have all consumer groups being certain in that market.

I think we look at face in totality obviously, we are guiding to an annual pace of what we saw in the first quarter, and we are going to as, I mentioned earlier, Barragan to look at our incentives to make sure that we can garner that pace. But I would say it's pretty even across the realm.

Jack Micenko -- Susquehanna International Group -- Analyst

Okay. Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Carl Reichardt from BTIG. Please go ahead.

Carl Reichardt -- BTIG -- Analyst

Good morning, guys. How are you?

Dave Cone -- Executive Vice President and Chief Financial Officer

Morning.

Sheryl Palmer -- Chairman and Chief Executive Officer

How are you?

Carl Reichardt -- BTIG -- Analyst

Fine. Thanks, David. Just clarify in the margin guidance for the year. I think you mentioned that you're kind of assuming there is going to be some incentive just assuming that seasonal or not.

If that's right, assume that you didn't have to raise incentives in any meaningful way. What we're kind of the emerging that would be, what are you assuming in terms of the aggressiveness incentives in your guidance?

Dave Cone -- Executive Vice President and Chief Financial Officer

I mean, you will definitely be at the higher end of Q2. We will say mid- to high 17%. We are allowing a little bit of room to deliver on that for us. We will definitely be on the higher end.

Sheryl Palmer -- Chairman and Chief Executive Officer

And I think some of that when I look at the number of closeout, we have to make sure that we thought a little bit of lingering through the first-quarter community count was a little higher than expected. And we are closing as many communities are reopening this year and we need to get through those quickly. We are making sure that we're prepared for that.

Carl Reichardt -- BTIG -- Analyst

You just answered my next question. So let me ask another one. If you're looking for land spend this year and the kind of what you're buying, can you talk about how the mix of assets you look at 4 2021, which is what you said you're buying for will differ from carpet legacy special sort of. If you can put some numbers on that will be quite helpful?

Sheryl Palmer -- Chairman and Chief Executive Officer

I don't know I can give you numbers. I don't know I have in my fingertips. You can have the best appliance when you actually get to the finish line could give you some woman that because, but what I would tell you is that, that decisions are absolutely, focused on two or three, one is affordable kind of millennial for first-time buyer and really the first Empire in all because to 55-plus. And those are you will see that manifest itself smaller communities not just the legacy large one that you have seen.

A smaller percentage buyer there are some market that we will still see that, but smaller piece of the overall plans.

Dave Cone -- Executive Vice President and Chief Financial Officer

Part of that I would like to add, and relevant mention supply probably stay roughly that we are trying to move a little bit more diverse options versus own. So kind of get back to a level that we had maybe three AV, and you will see that kind of over the next several quarters probably couple of years. In fact that's important here. I also forgot to mention say that conditions and other things we are focused on is really, as Dave mentioned, options the size of the Langdale.

Even as we look at potentially 55-plus lifestyle community, how do we secure that and how to be. But in totality, we are seeing the number, the number of loss that we will control individual land there has moved on And I think we will continue to do so.

Carl Reichardt -- BTIG -- Analyst

Great. Thanks, Sheryl. Thanks, David.

You, too.

Operator

Thank you. Our next question comes from Matthew Bouley from Barclays. Please go ahead.

Matthew Bouley -- Barclays -- Analyst

Hi. Good morning. Thanks for taking my questions. I wanted to ask about the competitive environment kind of how that's involving here.

Maybe a trial of an interesting reached any of our key markets. Anything worth highlighting perhaps you have seen that greater competitiveness persisting and then, which kind of markets have started to adjust more normalize?

Sheryl Palmer -- Chairman and Chief Executive Officer

Yes. Let me walk through real quickly because as I think, about it each of the market depends what you're talking about competition and sales competition in the land market for your, but I think, you're saying overall market. Phoenix as I start there, Phoenix demand draft is very strong in of a price point, but it is a very competitive marketplace when I look at the overall communities that are in the marketplace and the growth year over year is generally Phoenix at about 550. But cycle times are planning longer in Phoenix average their creating a lot of consumers.

I think Phoenix will be one of those hypercompetitive as I look at the California. Heart bucket together continues having a healthy season so no real news to report that. Dave what collared given a lot of the kind of media noise lately. But the competition appears to be holding pricing pretty well in those market.

We are seeing Centrale in all price point. We actually just opened a community in February in the first quarter with only six or seven weeks $0.20 on the board. So we are continuing to see really strong momentum in northern -- it was definitely those leveraged -- the businesses to move through the first-quarter January and February were not as robust as we have seen in the past, March was really quite strong and the buyers are definitely feeling cautious spring my a lot of that is we talked about in Q4 with the because that continued in the Southern California. But in March we really did see all consumer groups come back to the market.

The Chinese buyers are a little bit scary. But probably at a price point under $1 million, actually holding pretty good about three months. Have I move through the rest of the country, Denver continues to be very, very strong. I say there's a lack of affordable housing so that is creating a lot of inks for the consumer and we have continued to take pricing move very strong in that marketplace.

As I go to taxes, that's some really nice recovery in the business, and that's really across the board, really regardless of price point in some market. We have said the last time talking about Dallas and that market continues to be market specific. In Houston, I'm really delighted to see kind of year-over-year growth in just about every metric and Austin continued strong. And then I think we talked a little bit about Florida already.

We saw the 55-plus consumer come back as we moved our way through the first quarter. And lastly, I guess would be the Chicago holding stead, the Carolinas and Atlanta. Atlanta, that's probably worth a call-out. We've seen some strength there over the last probably eight weeks with sales really picking up.

And last year, many might remember that we pulled a number of new communities kind of off the shelf to rework product from a legacy business and we are going to see some nice community count growth as we move through the year, and we're really seeing that start to pay off in orders on the sales free up.

Matthew Bouley -- Barclays -- Analyst

Okay. Shirley, I really appreciate all that detail. Thanks for that. And then just one for Dave.

I think you mentioned still some purchase accounting benefit in the quarter. Is there any, I guess, quantification there? And how should we expect the purchase accounting impact or, I guess, benefit to be over the next couple of quarters? Thank you.

Dave Cone -- Executive Vice President and Chief Financial Officer

Yes. For this quarter, for Q1, the benefit was offset by the lower-margin drag from the AV business. They are roughly about 60 basis points, and I think you will see the drag kind of sit there around 60 basis points for the next several quarters. The purchase accounting benefit will probably drop by about 20 basis points for each of the next couple of quarters.

Matthew Bouley -- Barclays -- Analyst

All right. Perfect. Thank you very much.

Operator

Thank you. Our next question comes from Nishu Sood from Deutsche Bank. Please go ahead.

Nishu Sood -- Nishu Sood -- Analyst

Thank you. I wanted to just go back to the community- count question. I think you have mentioned a few things but just wanted to kind of revisit that. So in the mid-February, you were looking at, I think, 350 to 360 community count, came in much stronger than that.

You mentioned some AV impact that there was a pretty strong community-count growth across your regions. What specifically drove the delta versus your expectations. You had pretty good demands, so I'd expect your close-outs were anticipated. So just wanted to revisit that, please.

Sheryl Palmer -- Chairman and Chief Executive Officer

No. It really was the close-outs. We did have strong demand, but it was really -- when you look at the way we count community count, it's when you have less than five sales, I believe, to book, you -- is when the community falls off. And I think we just had in certain communities, and it was probably about seven or eight communities, we ended up with six sales -- or six upsells remaining.

And so those still became part of our community count.

Dave Cone -- Executive Vice President and Chief Financial Officer

And we often say community count is probably the hardest thing that we guide on between trying to get the timing of the closeout, as well as trying to predict when new communities are coming online, just due to some of the delays that we've seen, either on the development side or through the municipalities.

Sheryl Palmer -- Chairman and Chief Executive Officer

It's a Cash-22, Nishu, because I -- as much as I wish we had those few sales to build a count -- community count difference, I'd rather that be the answer than the fact that we didn't get a lot of communities opened, but that really wasn't the case.

Nishu Sood -- Nishu Sood -- Analyst

Got it. Got it. And -- OK, so that's helpful. That kind of helps me with the -- my second question as well.

Obviously, everyone looks at the absorption pace. So it sounds like if it was slower-than-expected closeouts obviously based on the definition that you were laying out that it probably wouldn't have been a boost to absorption. And so the absorption pace was probably little bit better even than the numbers would have indicated. Am I kind of thinking about that correctly?

Sheryl Palmer -- Chairman and Chief Executive Officer

I'm not sure because I think if you'd closed out that, your community count would be lower with sort of adjusting your pacing issue. If you could have actually significantly because if I'd gotten one more sale in nine communities, it would have -- I would have dropped off nine committees only for nine sales. I would have actually --

Dave Cone -- Executive Vice President and Chief Financial Officer

That would have boosted. I mean, you're getting a pace, both on the numerator and the denominator of the calculation.

Sheryl Palmer -- Chairman and Chief Executive Officer

Yes.

Nishu Sood -- Nishu Sood -- Analyst

Wait. No, no. I think we're saying the same thing. If you would -- if the community counts came in stronger than expected because, let's say, you brought forward openings and maybe even had some grand opening sales event --

Sheryl Palmer -- Chairman and Chief Executive Officer

You know that I brought them. I don't want to accept that because that's very hard.

Dave Cone -- Executive Vice President and Chief Financial Officer

My point was just it's hard to predict. Yes, we don't -- we normally don't accelerate the openings.

Sheryl Palmer -- Chairman and Chief Executive Officer

So really what it is is you ended up with more communities based on potentially it could have been one sale per community drove a community and inflated community count in my opinion.

Nishu Sood -- Nishu Sood -- Analyst

Got it. Got it. No. I understand.

I will come back later. Thank you.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our last question comes from Alex Barron from Housing Research. Please go ahead.

Alex Barron -- Housing Research -- Analyst

Yes. Thank you. So I was looking back a couple of years and it seems like your orders typically are a little bit less than second quarter than first quarter. Do you think this year might be an exception to that?

Sheryl Palmer -- Chairman and Chief Executive Officer

No. I think that, that seasonal trend would be -- well, it depends if you're talking pace or your talking total orders --

Alex Barron -- Housing Research -- Analyst

Just absolute units.

Sheryl Palmer -- Chairman and Chief Executive Officer

Yes, absolute units. When I look at absolute units, just given -- I think our paces are going to be down, just given the strong comp we have. But I think absolute orders will be up given the acquisition.

Dave Cone -- Executive Vice President and Chief Financial Officer

If you look at overall mix -- look at our mix penetration, yes, you normally see it to be slightly lower with Q3, Q4 roughly about the same.

Alex Barron -- Housing Research -- Analyst

Okay. And great. And then as regards to the margins, I'm not sure if I didn't hear or maybe missed it. If you guys comment on what the incentives represented maybe as a percentage of ASP versus a quarter ago or a year ago?

A bit lower or even in percentage wise.

Sheryl Palmer -- Chairman and Chief Executive Officer

Lower year over year.

Dave Cone -- Executive Vice President and Chief Financial Officer

Lower year over year. Incentives were a little bit lower year over year in Q1.

Alex Barron -- Housing Research -- Analyst

Okay. All right. Okay. Thanks.

Sheryl Palmer -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. This concludes our Q&A session. At this time, I'd like to turn the call over to Sheryl Palmer, chairman and CEO, for closing remarks. Please go ahead.

Sheryl Palmer -- Chairman and Chief Executive Officer

Well, I just want to thank everyone for joining us this morning to share our first-quarter results. We're quite pleased with the outcome and was delighted to share with the market, and we look forward to talking to you next quarter. Thank you.

Operator

[Operator signoff]

Duration: 58 minutes

Call participants:

Jason Lenderman -- Vice president, Investor Relations and Treasury

Sheryl Palmer -- Chairman and Chief Executive Officer

Dave Cone -- Executive Vice President and Chief Financial Officer

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

Paul Przybylski -- Wells Fargo -- Analyst

Alan Ratner -- Zelman and Associates -- Analyst

Scott Schrier -- Citi -- Analyst

Jack Micenko -- Susquehanna International Group -- Analyst

Carl Reichardt -- BTIG -- Analyst

Matthew Bouley -- Barclays -- Analyst

Nishu Sood -- Nishu Sood -- Analyst

Alex Barron -- Housing Research -- Analyst

Alex Barrn -- Housing Research -- Analyst

More TMHC analysis

All earnings call transcripts