William Lyon Homes (WLH) Q1 2019 Earnings Call Transcript

William Lyon Homes (WLH)
Q1 2019 Earnings Call
May. 02, 2019, 12:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the first-quarter 2019 William Lyon Homes earnings conference call. My name is Liz, and I will be your operator today. [Operator instructions] This call is being recorded and will be available for replay through May 9, 2019, starting this afternoon approximately one hour after the completion of this call. [Operator instructions] As a reminder, today's conference is being recorded.

Now I'd like to turn the call over to Mr. Larry Clark, investor relations. Please go ahead, Mr. Clark.

Larry Clark -- Investor Relations

Thank you, Liz. Good morning and thank you for joining us today to discuss William Lyon Homes' financial results for the three months ended March 31, 2019. By now, you should have received a copy of today's press release. If not, it's available on the company's website.

The press release also includes a reconciliation of non-GAAP financial measures used therein. In addition, we're accompanying -- including an accompanying slide presentation that you can refer to during the call. You can also access these slides in the investor relations section of the website. Before we continue, please take a moment to read the company's notice regarding forward-looking statements, which is shown at Slide 1 in the presentation and included in the press release.

As explained in the notice, this conference call contains forward-looking statements, including statements concerning future financial and operational performance. Actual results may differ materially from those projected in the forward-looking statements, and the company does not undertake any obligation to update them. For additional information regarding factors that could cause actual results to differ materially from those contained in the forward-looking statements, please see the company's SEC filings. With us today from management are Bill H.

Lyon, executive chairman and chairman of the board; Matt Zaist, president and chief executive officer; and Colin Severn, senior vice president and chief financial officer. And I would like to turn the call over to Bill Lyon.

Bill Lyon -- Executive Chairman and Chairman of the Board

Thank you, Larry. Welcome, ladies and gentlemen, and thank you for taking the time to join us today. Overall housing demand across our markets has demonstrated signs of recovery from the market pause that occurred in the back half of 2018 as interest rates have receded and consumer demand has rebounded against the backdrop of ongoing strong employment and wage growth in a broader U.S. economy.

Heading into this year, our operating teams made certain pricing adjustments, as well as used targeted incentives to find the right balance to capitalize on the more favorable market conditions. As we discussed on last quarter's conference call, we sold and closed fewer spec homes during the fourth quarter of 2018 than we had anticipated. Our teams took advantage of this higher spec inventory during the first quarter of this year, strategically targeting these homes for sale and converting these sales into closings, yielding better-than-anticipated closings and cash flows for the company. We delivered 949 homes during the quarter, which is up 28% year over year and generated $454 million of home sales revenue, which is up 22% from the prior year, both records for our first quarter.

Our pre-tax net income for the quarter was $20 million and our after-tax net income was $8.1 million or $0.21 per diluted share. We ended the quarter with a William Lyon Homes stockholders' equity of approximately $872 million and a total equity of north of $1 billion, equating to an overall booked value per share as of March 31, 2019, of $23.05 and a tangible book value per share of $19.62. During the first quarter, we experienced improving demand as the quarter progressed, which is typical for a spring-selling season. Overall, our net new home orders of 1,103 homes were flat compared with the prior year and reflected an order pace that was closer to historical averages than last year's outsized first-quarter pace.We continue to see strength in the entry-level and first-time move-up buyer segments which combined represented 83% of both our Q1 closings and backlog as of the end of the quarter.

These needs-based consumers are responding well to our communities that offer a tangible housing at or below market median prices. In summary, we're encouraged by the start of our year and remain focused on delivering on our growth plans and other strategic objectives, all with a view toward generating attractive returns to our shareholders in 2019 and beyond. With that, I will now turn the call over to Matt for additional commentary on our first-quarter operations. Matt?

Matt Zaist -- President and Chief Executive Officer

Thanks, Bill. The first quarter of 2019 played out generally as we had expected and reflected a nice rebound from the volatility experienced late last year. Net new home orders for the first quarter were flat compared to last year's very strong first quarter and the order cadence accelerated each month as the quarter progressed. January's 2.4 sales per community were a bit light relative to historical figures, but it did reflect the sequential improvement over the 2.2 sales per community per month in December of 2018.

The absorption pace was incrementally better in February at 2.9 sales per month, and that picked up meaningfully in March to 4.1 sales per month, bringing us back in line with historical norms. Similar to our increase in absorption rates, we experienced a decrease in our month-over-month cancellation rate with a 21% cancellation rate in January, decreasing to 14% in February and further decreasing to 13% in March for an overall cancellation rate for the quarter of 16%. From a demand perspective, our top-performing markets during the quarter were Colorado, Arizona and Texas, all of which experienced absorption rates well in excess of the company average. Much of our success in these markets can be attributed to our focus on the entry-level buyer segment, where we are seeing tremendous consumer response to our high quality and competitively priced product.

Colorado was our strongest performer in the quarter in terms of year-over-year performance, recording 172 net new home orders, which is a 19% improvement over last year while selling for four fewer communities. Our monthly sales pace in Colorado during the first quarter increased 63% year over year to 5.2 sales per community. The changes we have made in products and strategic focus in that market continue to pay dividends, specifically our introduction of townhome and small-lot detached homes selling at prices well below the median sales price of new homes in the Denver MSA. Arizona continues to perform very well as it generated a first-quarter absorption rate of 4.1 sales per community per month, which was driven by attractively positioned new community openings, including both market rate and active adult products.

Sales pace at our entry-level price points in Arizona for the first quarter was 6.2 sales per community per month. Our Meridian master-plan community continues to lead the way for that division with healthy sales activity at all price points and accounted for 80% of our division's orders. We continue to be pleased with our performance in Central Texas which we view as one of the best new home markets in the country and where we have quickly grown into a top five builder in Austin. In Texas, we offer a range of affordable new detached homes, targeting predominantly the entry-level buyer.

During the first quarter, our Central Texas operations led the company with 264 net new home orders which translated into a monthly absorption pace of 3.7 sales per community. Breaking out Austin specifically, we experienced a monthly absorption pace of 4.3. In Washington, we experienced a reasonably healthy absorption pace during the first quarter, picking up from the low levels realized in the back half of 2018. Last year, the economic engine that drives Seattle caused the housing market to become a bit overheated, and affordability concerns grew alongside significant price appreciation and the rise in interest rates.

Our team made certain price reductions that we have now seen consumer demand improve with a lower-rate environment and the appropriate pricing levels on our communities. Overall, the sales pace in Washington was 3.2 sales per community per month in the first quarter of '19, the fastest pace in several quarters. In Southern California, one of our biggest challenges last quarter was the increase in cancellation rates in the Inland Empire. During the first quarter, the Inland Empire's cancellation rate returned to a more normal level, decreasing 600 basis points from the fourth quarter of last year and our monthly absorption rate in the IE was 2.8 sales per community.

Turning to the coastal Southern California market, our monthly absorption rate was 2.7 sales per community. We continue to see strong performance out of our Ovation active adult project in Orange County which had a monthly sales rate significantly higher than the SoCal average. Looking forward, we remain extremely excited about our seven new communities in our Novel Park master plan opening in the second quarter and expect these projects to be a meaningful contributor to the company over the coming year. In Northern California, we experienced a monthly sales pace of 2.7 homes per community.

During the quarter, we were closing out several communities as we prepare to transition from our very successful Bayshores project into our new SoHay master plan. SoHay will represent three new entry-level and first-time move-up communities which will also open for sale in Q2. On last quarter's call, we mentioned we are closely watching the Portland and Las Vegas markets. And I'd say these continue to be our two most challenging divisions from a demand standpoint.

In Oregon, for us, it's a tale of two-buyer segments: the entry-level and first-time move-up consumers continue to drive the market at a combined absorption level of 3.3 sales per community per month, above the 2.4 monthly sales pace for the market as a whole across all of our price points. The higher price point offerings had encountered more resistance based on affordability constraints. We've also been a bit gapped out recently on our more affordable, small-lot detached offerings in this market. We are focused on bringing additional product to the market to address this need.

The data remains somewhat of a challenge from a sales perspective as we have not seen the same rebound that we've experienced in some of our other markets. We are repositioning our products in certain of our projects to offer better affordability. We're also focusing our sales and marketing spend in the division on driving the right traffic to these projects. Our dollar value of orders for the first quarter of 2019 was approximately $500 million, which is down 17% year over year.

The year over year decline is driven primarily by a lower ASP of orders due to mix, including a full quarter of operations on our Central Texas division and our continued focus on the entry-level buyer segment. In addition, certain of our higher ASP divisions such as coastal Southern California and Northern California produced fewer orders on a relative basis because of gapping up and timing of bringing on new communities. Our backlog conversion rate for the quarter was a very strong 91%, the highest backlog conversion rate we've achieved in several years. We sold and closed nearly double the amount of specs compared to last year, and those sales represented 41% of all homes closed during the quarter.

Our average community count for the first quarter was 118, up from the 84 average communities during the prior year. We continue to expect to be selling out approximately 125 new home communities by the end of the second quarter. For a discussion on our financial results, I'll turn the call over to Colin before wrapping up with some commentary on our outlook for the remainder of 2019.

Colin Severn -- Senior Vice President and Chief Financial Officer

Thank you, Matthew. Total homebuilding revenue for the first quarter of 2019 was $454 million as compared to $372 million in the year-ago period, an increase of 22%. The increase in home sales revenue was primarily due to a 28% increase in the number of homes delivered, partially offset by a 5% decline in ASP. During the first quarter, our homebuilding gross profit increased to $73 million, up 12% compared to the first quarter of 2018, and our adjusted homebuilding gross profit also increased 10% to $93 million.

GAAP gross margins for the first quarter were 16% compared to 17.5% in the year ago period. The year-over-year decline in gross margins was due primarily to the increased incentives that we've mentioned previously. Incentives as a percentage of revenue per homes closed during the first quarter were 3.3% compared to 2.2% last year. Our adjusted homebuilding gross margin percentage was 20.5% during the first quarter and 22.7% in the year-ago period.

Our sales and marketing expense for the quarter was 5.6% of homebuilding revenue as compared to 6.1% in the year ago quarter. The 50 basis point improvement was primarily due to improved leverage on the higher revenue as well as a decrease in advertising and model operations expense. General and administrative expenses were 6.4% of homebuilding revenue compared to 6.6% in the first quarter of 2018. These combined for a total SG&A expense of 12% for the quarter, a 70 basis point improvement over the year ago period and 100 basis points better than our expectations.

Income from our unconsolidated mortgage joint ventures was approximately $1 million, consistent with the first quarter of 2018. On last quarter's call, we mentioned that we are on track to have a full suite of financial services available to our homebuyers on a wholly owned basis later this year. We've continued to make progress on this strategic initiative year to date under our recently launched ClosingMark Financial Group brand. We launched our title agency business in Texas during Q1 and expect to launch title and settlement services operations in our other markets through the next two quarters.

In April, we also closed on the acquisition of a small mortgage platform for a relatively de minimis amount of net cash. The operation is currently licensed in all of our existing markets and has all of the GSE seller/servicer approvals as well as Ginnie Mae authorization. We anticipate integrating our existing mortgage joint venture operations and loan pipeline into this platform under the ClosingMark brand over the next -- over the course of the next two quarters. Turning back to the quarter.

Pretax income for Q1 was $20 million, up from the $15.4 million in the year-ago quarter. Our provision for income taxes during the first quarter was $4.9 million or an effective tax rate of approximately 24%, driven by onetime discrete items related to stock compensation expense that impacted the provision during the quarter by approximately $700,000. We would anticipate our income tax rate to be approximately 21% in Q2 and blend to an all-in rate of 21% to 22% for the full year. Income attributable to noncontrolling interest was $7 million during the quarter, up from $4.3 million in the year ago period.

The higher-than-expected minority interest figure was driven primarily by an additional phase of deliveries in a joint venture project in Southern California not previously expected to close in Q1. Net income available to common stockholders during the first quarter was $8.1 million or $0.21 per diluted share based on 38.8 million fully diluted shares. Our land acquisition spend for the first quarter was $71 million, including land acquisition and horizontal development costs. We expect to continue to moderate our land spend at a level consistent with our long-term leverage goals while also strategically allocating capital to our markets.

As of the end of the quarter, our total lot count of owned and controlled lots was 28,842. Option lots accounted for 38% of our total lot inventory. As is typical, we expect cash flow generation to be more significant in the back half of the year. We intend to drive balance sheet improvement through accretion of earnings as well as reduction in the principal amount of our indebtedness and expect to see meaningful improvement in our leverage metrics this year.

Now turning to our balance sheet. We ended the quarter with $2.6 billion in real estate inventories, $2.9 billion in total assets and total equity of $1 billion. We ended the quarter with total liquidity of approximately $290 million, including our cash balance and the availability under our revolving credit facility. Our total debt to book capitalization was 57.4% at the end of the quarter and our net debt to net book capitalization was 56.6%.

We remain focused on achieving our leverage goals, and we anticipate continuing to drive leverage down over the course of the next two years. Now I'll turn it back to Matt.

Matt Zaist -- President and Chief Executive Officer

Thanks, Colin. Before we open up the call to your questions, I'd like to provide some additional information regarding our near-term outlook. For the second quarter of 2019, we are expecting new home deliveries of between 1,000 and 1,050, which would represent a backlog conversion rate of 84% to 88%. We expect ASP per delivery during the second quarter to be between $455,000 and $465,000.

We expect the GAAP gross margins for the second quarter to be flat compared to the first quarter. We had previously forecasted a sequential improvement in gross margins based on incentives trending lower. For a majority of our projects and a majority of our operating divisions, the sequential improvement is holding true. However, based on the current variability in our division margins, as well as the timing of certain project closings, this is how we see the second quarter mix playing out.

We do continue to expect to see improvement in divisional margins as we move through the subsequent quarters. Our expected SG&A percentage for the second quarter is expected to be 11.7% -- between 11.7% and 12%, and we anticipate income attributable to our noncontrolling interest of approximately $3 million to $3.5 million during Q2. For the full year, we remain focused on delivering as many homes as we can. We experienced a fair amount of volatility in the back half of last year, as well as the beginning of this year.

While we're encouraged by the better start to the spring-selling season, we'd like to get through the balance of the season before providing any full-year guidance metrics. Consistent with our comments on the year-end conference call, we intend to moderate land spend and generate positive cash flow this year to improve our balance sheet metrics, including lowering overall indebtedness in addition to accreting earnings throughout the year. I'd now like to open up the call to your questions. Operator, we're ready for the first question.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Alan Ratner with Zelman & Associates. Your line is now open.

Alan Ratner -- Zelman and Associates -- Analyst

So first question, just on the activity through the quarter, good to see the sales pace accelerating nicely through March. Just hoping you could talk a little bit about -- what were you doing on the pricing front? As those absorptions were improving, were you able to pull back at all on those incentives that you were offering earlier on, maybe even raise price in some communities? And did that momentum continue into April?

Matt Zaist -- President and Chief Executive Officer

Yes. Good question, Alan. So first, yes. I would say that as we look at incentives in backlog and expected incentives and closings, we are seeing that number on a percentage-basis come down.

And as I mentioned, part of Q2 a little bit is mixed, but six of our nine operating divisions are all seeing sequential improvement in margins. We got one that's flat and a couple that are down. As I mentioned, we've got a couple of divisions that have been a bit harder to reenergize and we've got to make sure that we're priced appropriately in those couple of markets. And look, as we've stated, January was still below our expectations.

While it was incrementally better from December, I'd say as we move into the back half of February and obviously March, feeling much better about the consumers' mentality. From a pricing power perspective, look, we're seeing the ability to get some net gains in Central Texas, Austin in particular. Phoenix continues to be a market where we're seeing incremental pricing power, definitely Denver. I'd also say on a positive front, Coastal California continues to be significantly better, certainly, compared to the back half of last year.

Our Southern California coastal markets, our Q1 backlog was about $750,000. The new home median, when you combine L.A., Orange and San Diego Counties, are in excess of that. And we've got, in Orange County, FHA loan limit and coastal loan limit of $726,000. So markets where we've got availability of good financing options and we find that sweet spot of being below kind of that new home median or where we're really trying to see and encouraged to see some pretty favorable dynamics.

Looking at April, again, we go through an audit process of orders, so I don't want to give a specific number yet. But overall, April was pretty solid for us. Certainly, March had the benefit of 31 days and five full weekends. April, we closed our sales offices for both Good Friday and Easter Sunday and then we had the Passover holiday in between there.

So we ended up with 28 sales days in April. Kind of adjusting for kind of those types of differences, April had a very similar feel to March. So look, encouraged -- and again, this is a period of time when we should be feeling optimistic about our business. I think we want to make sure we get through the selling season and continue to feel so, and in which time, we'll give you guys a bit more guidance relative to how we see the full year.

Alan Ratner -- Zelman and Associates -- Analyst

That's very helpful, Matt. Really appreciate that. And then second question, if I could, maybe this is for Bill or Matt, if you want to chime in, just the announcement this morning regarding the limited waiver to pursue a possible business combo. Just curious what the thinking, what the story there is, if you can offer any color.

And the stock is up a lot year-to-date but still below book value, so I'm sure the valuation is playing a role in that to some extent.

Matt Zaist -- President and Chief Executive Officer

Alan, it's Matt. I'll maybe just start it and then I'll take it to Bill for any comments that he might have. First, as we noted in our earnings release this morning, the company's board of directors granted Bill's request for a limited Section 203 waiver. The Board felt that granting this waiver provides Bill and his family with the flexibility to engage with other potential co-investors and potentially make a proposal back to our Board that may be in the best interest of the company and all of its stockholders.

That's kind of how we're viewing it from the company's perspective, but I'll let Bill chime in on any commentary that he might have.

Bill Lyon -- Executive Chairman and Chairman of the Board

Yes. So this is Bill. From the family's perspective, I would say we've been pretty disappointed in the way the market has valued the company at a discount to both book and tangible book values for the last several quarters, especially in light of some strong revenue results and a record year last year. And the family wanted to have the optionality to explore alternatives consistent with our long-term investment goals.

There's nothing imminent. I'm not actively engaged in any transaction with the company, but circumstances may arise which would cause me to consider doing so. From time to time, third-party financing sources or potential partners have inquired whether I might be interested in exploring a go-private transaction, and removing the 203 impediment provides me and the family the best optionality to explore any opportunities which might arise.

Matt Zaist -- President and Chief Executive Officer

And you know Alan, I think I would just maybe close by -- look, I think at this point in time, from the company's perspective, is -- that's pretty clear as to what we've granted to Bill. And then I think for any more information beyond kind of Bill's statement there, I'd just refer people to Bill's 13-D filing, which is available on the SEC's website.

Alan Ratner -- Zelman and Associates -- Analyst

Thanks for that, guys. I appreciate it. Good luck.

Operator

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

Mike Rehaut -- J.P. Morgan -- Analyst

Thanks. Good morning everyone. First question, just a little bit more on the gross-margin trajectory. Matt, you kind of mentioned that 2Q being flat instead of looking for it to be up a little bit or up some amount, I don't know if you said a little bit.

But first quarter also just came a little bit shy of guidance. You said that -- I guess six out of nine divisions are still experiencing sequential improvement, but -- so it sounded like the flat sequential guidance was more due to mix. So just want to make sure if I'm understanding that right. And secondly, on a full-year basis, how should we be thinking -- I know obviously, you haven't given guidance for the back half, but we were previously expecting a step-up into the 17%, mid- to high 17% type of range.

Given the current incentive backdrop, I just was curious if you had any thoughts around the ability to achieve that type of range.

Matt Zaist -- President and Chief Executive Officer

Well, a couple of things. One, as I can't give any guidance for full year, so I guess I said we'll come back to you as we move through the balance of the selling season on that point. Look, it's purely mix-driven as we look at kind of the flat guide and it's -- look, we went through an acquisition last year where -- what -- we've burned through the purchase accounting, step up on the whip. We do mark all the land and there's step-up that is applied to every asset when you buy a company.

And I would say right now, Texas and the Inland Empire is lower than company average. And look, they've been selling really well. And as we're moving through assets that were stepped up and as we're bringing on new assets in particular in Texas, we see the gross-margin trajectory in those divisions moving higher as we move through the year. The good news is sales are really strong in both of those divisions, and we're going to deliver some pretty significant volume out of Texas and the Inland Empire in Q2 as we also did in Q1.

And so that can move things around a little bit. As it relates to the back half of the year, Mike, Northern California, which we know for a couple of years, had our Bayshores project, which you know that that division had the highest gross margins in the company. We're closing out the final few -- literally handful of units this quarter. SoHay is opening this quarter, but that's going to deliver units in the back half of this year as well as some very positive things coming out of Southern California as we move through the back half of this year too relative to current company average gross margins.

So I'm not going to give you a full-year run rate, Mike, but I think the mix for us is, again, pretty easy for us to kind of understand the why that's -- candidly, a couple of divisions are selling better than we thought at some lower margins but turning good cash flow. Q1, look, we also -- there too had some outstanding specs, as Bill mentioned in his prepared comments. We went into this year with a higher spec count. We sold a lot more specs than we had anticipated given our Q1 backlog conversion guide.

And look, standing inventory is going to have a higher incentive on it than something that's in process for a dirt sale. So that little -- kind of led into that 20-basis-point differential in Q1's results.

Mike Rehaut -- J.P. Morgan -- Analyst

So -- just so I understand your answer, Mark -- Matt, I'm sorry, before I ask my second question, I mean -- and again, I appreciate not having the full-year guidance or the back half guidance. But given the different moving pieces that you alluded to, do you still expect, at a basic level, some sequential improvement second half versus first half?

Matt Zaist -- President and Chief Executive Officer

Yes.

Mike Rehaut -- J.P. Morgan -- Analyst

OK. Just also second question, just kind of clarification on the announcement with regard to the limited waiver. And Bill, I appreciate your comments there, giving a little bit further clarity. You mentioned that this would give the ability to enter into arrangements with unaffiliated co-investors that you kind of pointed toward, I guess one avenue as a go-private transaction that you said over periods of time you've been approached around that possibility.

Just wanted to understand, and maybe it's more just in terms of the legal or the language around the announcement, does the limited waiver just allow for a go-private transaction? Or is it also allowed for a broader range of transactions? In other words, selling public to public M&A or acquired through a private builder, other types of combinations, so to speak.

Matt Zaist -- President and Chief Executive Officer

Mike, it's Matt. First, look, I think Bill gave his kind of prepared comments in the prior question. Relative to your add-on question, look, I would say this, look, Bill made a 13D filing and we made a waiver under certain Delaware statute. I know for a fact that the big bank that you work for has got a few attorneys that work for -- and I would just suggest -- Bill and I are not lawyers, so we're not going to go through what the ins and outs of that means.

So I would just potentially direct you to somebody who can give you the ins and outs of the statute that we waived.

Mike Rehaut -- J.P. Morgan -- Analyst

Thank you.

Operator

Our next question comes from the line of Scott Schrier with Citi. Your line is now open.

Scott Schrier -- Citi -- Analyst

Hi, good morning, gentlemen. So closings came in well above guidance and we've been hearing that from some other builders. There's been a lot of spec inventory on the ground. So you -- people are trying to move it.

And my original question was going to be, does this imply some kind of pull forward in what you're originally planning in 2Q? But it seems like from your numbers that you give -- that you expect for 2Q relative to where consensus expectations are, it seems like there's a lot of momentum there. And I'm curious, in your thought process, is -- if you could kind of delineate maybe what's coming from spec versus what's coming from backlog sales in that 2Q number.

Matt Zaist -- President and Chief Executive Officer

Well, I think we -- and again, obviously, we've got the benefit of kind of what we've been experiencing in April. But Scott, look, what you said is correct. I mean look, we sold better than expected in Q1. I think our backlog conversion rate for Q2 is expected to also be solid, and that's because of the sales activity we saw in March.

And as I've mentioned, April saw a good healthy sales activity. It's pretty balanced between what's in backlog and then obviously, at the end of Q1, what we sold thus far in April to close. And look, our expectations are we'll continue to sell houses in May that will be part of that full backlog conversion guide. We've got a different spec strategy in obviously every market that we operate in, but those markets that have a higher percentage of entry-level products are going to have more product on the ground available to sell in shorter escrows.

Scott Schrier -- Citi -- Analyst

Got it. And then on the SG&A front, can you talk a little bit about maybe some of the trends that you're expecting? Are we going to see more leverage? Or do you -- when you look you at areas where -- that you mentioned such as Texas with your new acquisition and strategy there and some of the things in the Inland Empire, do you need to invest more in the SG&A front there? Or do we expect we're at a point where we're going to continue to get an SG&A leverage?

Matt Zaist -- President and Chief Executive Officer

Yes. Good question. Maybe I'll take that to Colin.

Colin Severn -- Senior Vice President and Chief Financial Officer

Yes. So relative to the guidance we gave for Q2, we're seeing trends similar to previous years where SG&A is a little bit higher in the beginning of the year then trending down as we move through. So the way we think about it is, from a cadence perspective, we'd expect that trend this year in 2019 to be similar to 2018.

Scott Schrier -- Citi -- Analyst

Great. Thanks for that. I appreciate it.

Operator

Our next question comes from the line of Jay McCanless with Wedbush. Your line is now open.

Jay McCanless -- Wedbush Securities -- Analyst

Hey, good morning. Was going to ask, of the 1,000 to 1,050 closings for 2Q '19, what percentage of those do you expect to sell and close during the quarter?

Matt Zaist -- President and Chief Executive Officer

Jay, I don't know that -- there's a kind of a net impact, right? We've got -- I'd say roughly, it's about 30%. There's some ins and outs associated with that, but we've got our going in backlog that's always expected to close. We always have certain construction delays that kind of push some units. There's some amount of cancellation and then there's specs that are sold to close during the course of the quarter.

But net-net, I'd say somewhere in the high 20s to 30% would be our expectation.

Jay McCanless -- Wedbush Securities -- Analyst

Yes. That's more positive because that's -- one of the things I've been wondering this earning season is how much of this closing momentum in 2Q is actually coming just from more aggressive spec sales versus what seems, from your answer, to be a little bit better demand on the ground than what we saw during the back half of the year. My other question is on...

Matt Zaist -- President and Chief Executive Officer

Jay, maybe just to add on to that, I mean look, I think one of the things that we saw in the back half of last year is if you think through the lens of that entry-level buyer that obviously saw price appreciation in a number of markets, but as rates rose, that really did freeze them out, pushed them to the sidelines. And I think as rates have abated this year, the attractiveness on that spec inventory for that first-time buyer is -- "Hey, I can now afford that house that I wanted to buy last year that I just physically was unable to do so or was concerned about based on about the monthly payments." So all in all, I think that the change in the backdrop of the rate environment as well as consumer confidence I think definitely played a role in that. It's not just aggressive pricing on standing inventory or spec homes.

Jay McCanless -- Wedbush Securities -- Analyst

The second question that I had is around pricing power. And if you express it as a percentage of total communities, where right now do you think you're getting net pricing power where your base price increases are bigger than the incentives you have to throw out there?

Matt Zaist -- President and Chief Executive Officer

I would say Austin, Denver, Phoenix, recent openings in Orange County and selectively starting to see that in Seattle again which is encouraging.

Jay McCanless -- Wedbush Securities -- Analyst

And then just my last one very quickly is, are you seeing any land price discounts? Are some of these land sellers -- especially in markets like Portland, where we've seen median prices coming down in California or median prices have started to flatten out, are you seeing some land sellers maybe break the price a little bit and try to generate some of their own volume?

Matt Zaist -- President and Chief Executive Officer

Yes. I think it's what -- I think markets where we've seen home prices reset. Look, land is really kind of the fungible components of home price appreciation or depreciation. And so look, I think we've seen some deals in Seattle that have definitely reset.

Portland is a market where we're seeing some land reset. The Inland Empire, we're definitely seeing some reset there. Coastally, in California, look, even though the Bay Area has seen a pullback, look, there's not a bunch of -- for us, the Bay Area is very specific to the South Bay and East Bay markets. It's not like there's a bunch of available land sitting on the ground and it is highly competitive.

It's very tight. The same would hold true for L.A., Orange and San Diego Counties. We just -- I think land sellers are willing to be patient and allow for market conditions to settle, and we haven't really seen any reset in those markets. Las Vegas is a market where -- look, I think it depends on the buyer segment for sure.

And as a company, we've been at the one market where we've been probably more exposed to the move-up markets as opposed to the core entry-level markets. And I think we're seeing some reset in the move-up markets in the greater Las Vegas region.

Jay McCanless -- Wedbush Securities -- Analyst

Great. Thanks for taking my questions.

Operator

Our next question comes from the line of Alex Barron with Housing Research Center. You line is now open.

Alex Barron -- Housing Research Center -- Analyst

I wanted to talk about the margins. So I think I heard you correct that you expect flat margins for next quarter. Is that correct?

Matt Zaist -- President and Chief Executive Officer

Yes. That's correct.

Alex Barron -- Housing Research Center -- Analyst

OK. What about any guidance you can give toward the back half? But it sounded like these guys are using incentives to drive some of the sales. So would you expect the back half to be somewhat similar? Or would you expect maybe a bit of a pickup for some other product, mix reason or anything like that?

Matt Zaist -- President and Chief Executive Officer

Yes. Alex, I think Mike Rehaut asked that same question a couple of analysts ago. Look, I'd go back and reference what I previously stated to him. But we, again, the flatness in Q2 is mix related, divisional mix related relative to contributions.

We say that six of our nine divisions are showing sequential improvement in gross margins quarter over quarter. We have a period of time where we gapped out in our Northern California division, which is a high gross margin market for us, and we expect it to continue to do so. And we've got community openings here in the second quarter that will produce deliveries primarily late in the third quarter and into the fourth quarter, so we would expect to see back half lift in GMs. But we're not going to give specific's guide on what that is at this point in time.

Alex Barron -- Housing Research Center -- Analyst

OK. And when you mentioned that the land spend might be a little bit less, is that just due to waiting for land cost to go down? Or because you feel you have enough at this point?

Matt Zaist -- President and Chief Executive Officer

No. Look, I think consistent with the statements we've made in the past, look, I think we view -- with our land book, we've got good accessibility to lots that are going to allow us to continue to grow within our existing footprints. And so our expectation by moderating land spend is based on what we have available. We've done a good job of increasing the percentage of lots controlled or optioned versus owned.

And look, we want to continue to make meaningful improvement on our balance sheet metrics. And as Colin said in his prepared remarks, we anticipate lowering overall indebtedness as we move through this quarter or throughout this year. And through less debt and increasing of earnings, we want to improve the debt-to-cap metrics definitely.

Operator

And that concludes today's question-and-answer session. I'd like to turn the call back to Matt Zaist for closing remarks.

Matt Zaist -- President and Chief Executive Officer

All right. Well, I'd like to thank you all for joining us today. We look forward to speaking with you next quarter. Have a great day.

Operator

[Operator signoff]

Duration: 46 minutes

Call participants:

Larry Clark -- Investor Relations

Bill Lyon -- Executive Chairman and Chairman of the Board

Matt Zaist -- President and Chief Executive Officer

Colin Severn -- Senior Vice President and Chief Financial Officer

Alan Ratner -- Zelman and Associates -- Analyst

Mike Rehaut -- J.P. Morgan -- Analyst

Scott Schrier -- Citi -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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