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MDC Holdings Inc (NYSE:MDC)
Q4 2019 Earnings Call
Jan 30, 2020, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to M.D.C Holdings 2019 Fourth Quarter Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

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

Derek Kimmerle -- Director of SEC Reporting

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

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

These statements involve known and unknown risks, uncertainties and other factors that may cause the Company's actual results, performance or achievements to be materially different from the results, performance or achievements expressed or implied by the forward-looking statements. These and other factors that could impact the Company's actual performance are set forth in the Company's 2019 Form 10-K, which is expected to be filed with the SEC today. It should also be noted that SEC Regulation G requires that certain information accompany the use of non-GAAP financial measures. Any information required by Regulation G is posted on our website with our webcast slides.

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

Larry A. Mizel -- Chairman and Chief Executive Officer

Good morning. And thank you for joining us today as we go over our results for the fourth quarter and full year of 2019. Update you on current market conditions and provide some insight into our strategy moving forward. MDC ended the year on a strong note, generating fully diluted earnings per share of $1.42 for the fourth quarter, representing a 61% increase over the prior year period.

Net new orders in the quarter increased 49% per year-over-year as demand remained elevated to what is typically a less active selling season. We have seen this momentum carry into the New Year and believe that home shoppers are showing a noticeable interest in starting the home buying process now, rather than waiting until spring. This obviously bodes well for our industry as a whole and for our company.

We continue to see the strongest demand for home priced at or below the median level in our markets, which is where we have been positioning our company for several years. The demand drivers of our business remain favorable as we head into the New Year. December marked the six straight months of year-over-year declines in existing home inventory in the United States and the 1.4 million homes for sale was the lowest inventory figure since the National Association of Realtors began tracking this data in 1999.

This equates to a three month supply of homes at the current sales rate, which is well below the typical six months supply. The lack of existing homes supply should help reinforce the demand for our new homes as we enter 2020. The health of the domestic economy, strong employment and optimism for the future continues to be reflected in the elevated consumer confidence readings to the end of the year.

The consumers are also increasingly confident in the housing market, according to Fannie Mae's Home Purchase Sentiment Index, which rose considerably on a year-over-year basis in December and remains near all time highs. Lot approvals in the fourth quarter reached their highest level in over a decade, reflecting our optimism regarding the housing market and our confidence in our operating strategy. The bulk of these approvals were for more affordable price communities as we believe the demand for outlets for the millennials, empty nesters, and first time buyers of all ages will remain favorable for some time to come.

While I realize that investors are more focused on what's going to happen, rather than what's already happened, I think it's important to emphasize how far we've come in the last five years. Since 2015, we have seen a 59% increase in home deliveries, a 270 basis points improvement in gross margins and 880 basis point increase in return on equity and over 200% growth in pre-tax income.

We also improved our SG&A leverage and reduced our cycle time over that period. We accomplished this while maintaining one of the strongest balance sheets in the industry and delivering the highest dividend payout among our public homebuilding trading peers -- traded peers. We are proud of these accomplishments. Based on our outlook for the industry, we believe that we can continue to grow our operations in a profitable manner and deliver further improvements to our cost structure and return on capital. While trajectory will not always follow in a lineal path, we believe the outlook for MDC is positive and presenting a compelling opportunity for investors with a long-term approach.

With that, I'd like to turn it over to Bob, who will provide more details on our results from the quarter and the full year.

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

Thanks, Larry, and good morning everyone. As predicted on our last call, during the fourth quarter, we began to see a significant benefit from the recent surge in our orders and backlog as home sale revenues increased by 25% to more than $1 billion, and net income increased by 59% to $92.6 million or $1.42 per diluted share.

Our tax rate dropped from 21% to 17.5% for the 2019 fourth quarter. The decrease in rate was mostly the result of 45L energy efficient tax credits, which were extended to cover the 2018-2019 and 2020 tax years during December of 2019. During the fourth quarter, we recorded an estimate for the benefit we expect to receive from these credits of $6.5 million related to qualify in 2018 and 2019 home closings.

Our increased home sale revenues were the result of a 31% year-over-year increase in the number of homes delivered, driven by a 25% increase in the number of homes we had in backlog to start the quarter, as well as an increase in backlog conversion rates due to improved cycle times. Our backlog conversion rate was 52% including the estimate of 50% for the fourth quarter that we discussed in our previous call and higher than the 49% achieved a year ago.

The increase in units delivered was slightly offset by a 4% decrease in our average selling price to about $450,000. This decrease was in line with our strategic focus. And 62% of our closings came from product lines, we characterize as more affordable offerings as compared with 49% a year ago. Geographic mix also contributed to the decreased average selling price as we saw an increase in the percentage of the fourth quarter closings coming from our Phoenix and Orlando markets, which both had average selling prices, well below the company average. This is the result of strong order activity throughout 2019 in a higher backlog conversion level forecasted for the quarter in these markets.

Looking forward to the first quarter of 2020, we are targeting home closings, between 1,550 units and 1,650 units, which would result in a backlog conversion rate roughly in the 41% to 43% range compared to the 46% backlog conversion rate, we achieved in the first quarter of 2019. The potential for a lower conversion rate is primarily a result of the strong sales activity, we experienced during the fourth quarter as these homes are in our quarter-end backlog but most are unlikely to close in the first quarter.

Additionally, we believe our average selling price should remain above $450,000 for the first quarter of 2020 based on an assumption that our mix of closings should remain relatively consistent with the fourth quarter. Turning to slide 7, you can see that our gross margin from home sales improved by 40 basis points year-over-year to 18.5%. This increase was driven by a $9.7 million year-over-year reduction in inventory impairments, partially offset by lower margins in our California markets and a shift in mix to our Phoenix and Orlando markets, which had Q4 closing gross margins below the company average.

With that said, we have seen improving margins in these markets due to increased market demand, especially for our more affordable homes. Phoenix in particular, has benefited from this mix shift. And as a result, end of 2019, with an average gross margin of homes in backlog that exceeded the company average.

Relative to Q3, our gross margin decreased by 30 basis points. Similar to our year-over-year performance, the decrease can be attributed to lower margins in our California markets and a shift in mix to our Phoenix market. For the first quarter of 2020, we estimate that our gross margin for home closings should reach between 18.8% and 19.2% excluding impairments and warranty adjustments. The expected increase from Q4 to Q1 as a result of strong order activity during the second half of 2019, which allowed us to increase pricing in the majority of our communities. At the end of 2019, the estimated average gross margin of our homes in backlog was modestly higher than at the end of 2018, which is an encouraging sign for 2020.

As always, note that the gross margin level, we actually realize in the future periods could be impacted by cost increases, cancellations, price or incentive changes, impairments, reserve adjustments, and other factors. With the 25% increase in our home sale revenues, our operating leverage improved significantly year-over-year. Specifically, SG&A as a percent of home sales revenues decreased 110 basis points to 9.8%. Our total dollar SG&A expense for the 2019 fourth quarter was up $11.7 million from the 2018 fourth quarter. This increase was primarily due to variable components of our SG&A expense, such as a $6.8 million increase in our commission expense.

Our marketing expense increased by $4.1 million, which was largely due to the amortization of deferred marketing costs and master marketing piece, both of which are driven at least in part by higher home closings. Looking forward to the first quarter of 2020, we currently estimate our general and administrative expense to be roughly $46 million, which would be about even with the expense we just recognized in the fourth quarter.

However, our actual result for the first quarter could differ from this estimate for a variety of reasons, such as changes in the amount and timing of various accruals. The dollar value of our net orders increased 51% year-over-year to $685 million driven by a 49% increase in unit net orders and a 2% increase in average selling price. The demand for our more affordable product lines remain strong during the fourth quarter of 2019, accounting for 61% of our net new orders, compared with 54% a year ago.

This increase was largely attributable to the continued success of our Seasons Collection, which accounted for 46% of our net new orders in the 2019 fourth quarter compared with 36% a year ago. Our monthly absorption rate of 2.8 was a 28% increase from the 2018 fourth quarter and was our highest fourth quarter absorption pace since 2005. The improvement occurred both in more affordable and traditional product categories and the largest year-over-year percentage increases were in Phoenix, Seattle, Colorado and both Northern and Southern California.

Our fourth quarter net orders further benefited from a 16% year-over-year increase in average active subdivisions. As Larry alluded to earlier, our sales activity to this point in January has exceeded our expectations. We anticipate significant year-over-year growth for January similar to what we saw during the back half of 2019 once the month is complete. We ended the quarter with an estimated sales value for our homes in backlog of $1.75 billion, which was up 22% year-over-year on the strength of our new order activity in the second half of the year. The average selling price in backlog was down about 5% year-over-year driven by decreases in most markets in line with our more affordable home focus.

As I mentioned earlier, the estimated average gross margin of our homes in backlog at the end of 2019, was modestly higher than at the end of 2018, which is an encouraging sign for 2020. Active subdivision count was 185 to end the 2019 fourth quarter of 11% from 166 a year ago, in line with the expectation we set at the beginning of the year. As I'd mentioned during the past couple of calls, we don't see much opportunity for an increase in our active subdivision count for the first half of 2020, relative to where we ended 2019. However, we are optimistic about the potential for growth in the second half of 2020 based on land that we already control.

Our goal is to drive our ending active community count higher for a third consecutive year in 2020, but at this time, the magnitude of a potential increase is uncertain. The number of lots, we approved this quarter increased by over 200% year-over-year. This acceleration of activity reflects our confidence in market conditions and our focus on continuing to grow our business. Whereas, during the fourth quarter of last year, the direction of our business was less certain. On the strength of these lot approvals, the total number of lots we controlled at the end of the year was 18% higher than a year ago, and at its highest level in more than a decade.

For the 2019 fourth quarter, we acquired 3,292 lots for roughly $235 million and we spent an additional $118 million on development costs. Approximately 35% on the lots acquired in the fourth quarter were finished lots. Net homebuilding debt to capital was 21.5% at the end of the fourth quarter demonstrating our firm commitments to maintaining a strong balance sheet. Furthermore, our liquidity to end the 2019 fourth quarter was at $1.51 billion, providing us with significant resources to fund continued growth. And to start 2020, we've improved the balance sheet even more with a $300 million issuance of 10-year senior notes at a rate of 3.85%, the lowest for senior notes in our history.

Earlier on the call, Larry mentioned the significant progress MDC has made across a variety of metrics over the past five years. Notably, 2019 was the third highest net income year on record for MDC. That performance put us in a position to reward our shareholders through a 10% increase in our dividend declared just a few days ago. And the outlook is right to start the year with higher backlog value, higher backlog gross margin and higher active community count all point to the potential for increased top and bottom line results in 2020.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] First speaker is from Stephen Kim from Evercore. Please go ahead.

Stephen Kim -- Evercore ISI -- Analyst

Hey, guys. Steve Kim, Evercore. Good quarter. First, just a housekeeping, Bob. The tax credit that you thought -- I think you said $6.5 million, just want to clarify that was $6.5 million that you registered for 2019 and $6.5 million for 2018. And what are you looking for in 2020?

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

Yeah, I guess in aggregate, the impact on the income tax line was $6.5 million and that accounts for both 2018 and 2019. And I guess the impact on 2020 will really be -- will really depend on what closings come through and where they come through.

Stephen Kim -- Evercore ISI -- Analyst

Right. But probably something in the $3 million to $4 million range is pretty reasonable, I assume.

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

Yeah. All else equal, that would be reasonable.

Stephen Kim -- Evercore ISI -- Analyst

Can you talk about the gross margins and in particular, I'm curious as to what, sort of caused you to miss what your expectation was that you gave us a few months ago. And then the flip-side of that is just -- the guide obviously look pretty good. Maybe you can help us by sharing with us how the components of gross margin are kind of looking if there's anything worth talking about in terms of trend for inflation, either picking up or moderating with the materials for labor or land.

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

Yeah. And to be clear what we talked about on the last call, is the backlog gross profit margin being higher than the closings that we just had recognized in Q3, and that continues today and in fact, the differential is even greater. The backlog gross profit margin at the end of the year relative to where we ended Q4. So we did take a further step this quarter saying definitively that we think it's going to go up to that 18.8% to 19.2% range for Q1 based upon what we see right now. I think as far as the reasoning for it, when you look at what has happened with our closings, first of all, we've had a significant increase year-over-year in our closings, 31% and 25% increase in our revenues.

So a great thing because we got a 110 basis points of extra operating leverage. Now just what happens that a big part of that increase is occurring in markets like Phoenix and Orlando, where we've been a little bit smaller in the past few years, especially relative to Colorado and Nevada. So the good news is those markets are becoming more relevant to us. We're getting better market share in those markets, which is a great thing for our operations overall. And I think temporarily because the margins in those markets have been a little bit lower than the company average because they have been a little bit lower in scale. It has caused a little bit of a dip in our margins but those margins are improving in those markets.

And as I commented on earlier, the backlog gross profit margin in Phoenix, for example, is now well in excess of the company average. So no longer will it be a drag on our margins, all else equal, as we sit here today. So that's what I would say on that topic. Overall, I think it really is a positive that we're seeing more diversity in where our revenues are coming from and that we're seeing the margins in each of those markets accelerate.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, that's really encouraging. Can you talk a little bit about what you think is the components, whether it be land -- within your cost, land, labor, materials. Is there anything really to call out there? And on the labor side, I think you addressed maybe some increasing labor tightness, if you could maybe pull that into the commentary?

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

Yeah, I don't see a whole lot of that, yet. I mean, clearly with the industry doing well and a lot of builders talking about increased activity, there is the potential for that in 2020, but we've not see it come through yet. We have seen various municipalities to have started the year with increased fees or increased our requirements for development work. That's driven a little bit higher costs but not widespread at this point.

Stephen Kim -- Evercore ISI -- Analyst

Great, thanks guys.

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

Sure.

Operator

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

John Lovallo -- BofA Merrill Lynch -- Analyst

Hey, guys. Thank you for taking my questions. The first one, Bob, on the January order strength, it sounds like it was pretty impressive and clearly encouraging. Can you just give us a feel for what the monthly comps look like in the first quarter, I mean the February, March, get a little bit more challenging from that standpoint?

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

Yeah, let me -- I'll just give you kind of what January through March of last year look like. So in 2019, we are 475 in January, 2018 it was 492. February, 647 versus 618 and then March 834 versus 794. So as you went through last year, the comparisons did get tougher in that February-March were those increases year-over-year, whereas January was that year-over-year decrease in 2019.

John Lovallo -- BofA Merrill Lynch -- Analyst

Got you. That's perfect, OK. And then maybe just going back to the gross margin in Phoenix and Orlando, I just want to make sure, I understand this. So the lower gross margin that we experienced in the quarter, which was due to some inefficiencies maybe do to scale, not being optimized previously, but was there anything else that happened that would have resulted in those margins in those regions being lower, I mean was there increased discounting there earlier on or is it really just a function of scale?

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

I think a lot of it is a function of scale, I think in Orlando, we are all seasons and that buyer, sometimes requires a little bit of extra financing incentive for example. I would think that that's probably the only thing I would call out in particular. To a lesser extent, you have that in Phoenix, but certainly in Orlando.

John Lovallo -- BofA Merrill Lynch -- Analyst

Okay, thanks guys.

Operator

The next question comes from Alan Ratner from Zelman & Associates. Please go ahead.

Alan Ratner -- Zelman & Associates -- Analyst

Hey guys, good afternoon. Thanks for taking my questions. Bob, I was hoping to expand a little bit more on the comments you have given on the mix impact on margin. And I guess my question is as you look at your '19 growth obviously very impressive much stronger than the market. Was there a -- perhaps strategy as the year went on where you identify these markets, where you perhaps had some sub-optimal scale. And perhaps chose maybe not to be as aggressive on pushing price or lowering incentives in order to get those markets to kind of an optimal scale level perhaps that would maybe explain the very strong volume, perhaps a little bit of expensive margin that other builders are reporting?

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

Yeah, I would say there is some truth to that. I don't think it's quite that binary. That is just one of the other. We're still looking at individual subdivisions where we have really strong activity and increasing prices as appropriate. But I do think there is an importance due to local market scale and I was actually thinking about you a little bit, Alan, because I remember in the reports past, your reports talking about that very thing. So, I think it's something unique to MDC that we have a variety of markets that are a little bit lower on the scale and have that opportunity to improve in the future as we get more and more of that scale and certainly you can see that we're getting more and more of that scale based upon our order activity and our backlog. So I think what you're pointing to is fair.

Alan Ratner -- Zelman & Associates -- Analyst

Got it. That's helpful. Bob, I appreciate that. And I guess just thinking about the future now, you obviously turn your land book faster than others and you did a great job of increasing your lot count this quarter. So I'm just curious as you look at the underwriting assumptions embedded within those recent land purchases, A, what does the composition of land look like, is it spread out perhaps a little bit more evenly across your markets given the fact that some of these smaller markets have grown? And what's the underlying margin assumptions within these? Is it in line or better than what you're currently delivering?

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

I would say the underlying margin assumptions are in-line or better than what we're currently delivering. And I think as far as the dispersion of where those acquisitions are occurring, I think we get activity pretty much everywhere in terms of the loss that we've approved. I don't think there's anywhere where we're really saying, hey let's put the brake on, we've already grown enough. So I think each of the markets, the ones that are smaller for us are receiving some of the capital just as well as our larger markets are.

Alan Ratner -- Zelman & Associates -- Analyst

I guess what I was getting with that would Bob those like if you look at the markets where you grew outsize this year, you mentioned Phoenix and Orlando is an example, those are now a bigger piece of your business compared to say Denver was a year or two ago. So is the current mix of your business more appropriate to think about going forward geographically?

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

Yeah. As I mentioned, as you look at Q1, some of the assumptions that we've laid out for you for Q1 are based upon a mix similar to Q4, which did include lower contribution from a places like Colorado and higher contribution from places like Phoenix and Orlando.

Alan Ratner -- Zelman & Associates -- Analyst

Okay, got it. Thanks guys, good luck.

Operator

The next question comes from Michael Rehaut from JP Morgan. Please go ahead.

Margaret Jane Wellborn -- JP Morgan -- Analyst

Hi guys. This is Maggie on for Mike. First, I have a broader question on gross margins. So you've talked so far about the last couple of quarters and kind of the geographic mix, how that's impacted the last couple of quarters. But as you look into the medium and longer term in the future, how are you thinking about the impact of affordable product on margins? I mean, prior to last couple of quarters, you had seen nice improvement over the last couple of years. So do you see any additional upside from the expansion of your affordable lines or do you feel that you've reached kind of a steady state there where the further margin improvement would be more market driven?

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

Well, I think if you go back six, seven quarters ago, the margin was higher in affordable products. And that's really come in quite a bit. It's more similar to our traditional product at this point. So the increase of the percentage of units that we're doing with the affordable product wouldn't necessarily drive the margin one way or the other. And what's more is, we're already at 62% affordable product in our deliveries in Q4. Previously, I talked about, it could go a little bit higher than that, maybe as much as 70%, but there is not necessarily a whole lot of room to go there in terms of how much that represents of our overall mix at least from what we see right now. So I don't see it having a big impact on margin in isolation.

Margaret Jane Wellborn -- JP Morgan -- Analyst

Okay, thanks. And I think you mentioned that you were able to raise prices in the majority of your communities this quarter. So could you elaborate on that a little bit maybe what percentage of communities, or the percentage price increased on average?

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

Well, it's actually, the comment was the majority in the back half of 2019. And we did raise prices on about half of our communities in the fourth quarter, just the fourth quarter. Keep in mind, obviously it's typically lower activity in the fourth quarter. So that's not as much the focused increase pricing. Also keep in mind that in Q3, we increased prices in 80% of our communities, like we talked about on our last call. And then as we started 2020, we focused again on more price increases as we anticipated the spring selling season coming up. So I think you have to look at all those data points together to kind of see how we've approached it.

Margaret Jane Wellborn -- JP Morgan -- Analyst

Okay, thank you.

Operator

The next question comes from Paul Przybylski from Wells Fargo. Please go ahead.

Paul Przybylski -- Wells Fargo -- Analyst

Thank you. Bob, you mentioned Phoenix gross margins were now a tailwind. I was wondering if you could add any color around where Orlando gross margin stand in relation to the company average? And then along that line, I believe your E-swaps were up 36% in the quarter. Was that Orlando or Florida driven versus the Mid-Atlantic?

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

So on the first question, the backlog margins in Orlando are still below the company average and of course Orlando was a much smaller piece of our pie as you look at backlog, it's probably a third of the size of Phoenix. So Phoenix will be more impactful at this point. And then I don't think I got the second part of your question.

Paul Przybylski -- Wells Fargo -- Analyst

Yeah, your East region lot count, I think was up 36%. Was that mainly in Florida or was that Mid-Atlantic growth?

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

I think it was mostly Florida.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. Okay. A then if your specs were down 15% year-over-year, any plans to kind of bring that back up as we head into the spring selling season?

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

No.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. And then with rates moderating, have you seen any increased designs in this --

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

Nothing material.

Analyst

Okay, all right, appreciate it. Thank you.

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

Sure thing.

Operator

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

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

Hey Jay.

Operator

Jay, is your line on mute?

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

We can't hear you, Jay.

Jay McCanless -- Wedbush Securities -- Analyst

Can you hear me now?

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

Yeah that's better.

Jay McCanless -- Wedbush Securities -- Analyst

Perfect. Sorry about that. [Technical Issues] Just talk about the strength in the move-up demand or has that continued into January and what are you seeing like additive standpoint of incentives on that move up product for what you guys were doing but then also what the other competitors --

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

I don't have a whole lot of color for January at this point, but I do think the trends were positive in the fourth quarter from an incentives standpoint, I'm not sure I have the exact details on that either, but I think we're seeing the ability to have that move up products, the incentives be pretty moderate and see those incentives decreased just as incentives on other product decreased over the past year. And keep in mind when we talk about move up product, we've moved away from some of the really big product when you talk about 4,000 square foot plus product in markets like Phoenix, we're not doing as much of that anymore. So it's a little bit of a different segment of the move-up market as well. Certainly, not focused on more of that luxury buyer, more focused on the middle of that segment.

Jay McCanless -- Wedbush Securities -- Analyst

And then, I had a two-parter question on [Technical Issues] I guess the first one is, I understand you guys aren't willing to give what you think [Technical Issues] the end of this year. Is that a function [Technical Issues] but then also if we think about that community count at the end of this year, is the community count still going to be producing somewhere between 60% to 70% of your [Technical Issues] affordable or is there going to be a [Technical Issues]

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

Yeah, I think is for community count, kind of the short-term outlook, we see -- I think the -- sometimes we gave on a number that, that is the number that soon to be inactive versus soon to be active. So we've got about three more soon to be inactive versus soon to be active. So that's kind of what tells a short-term, there's not going to be a whole lot of movement.

Longer term, we have roughly 150 communities that are no activity started yet, and that was 115 a year ago. So we got about 30% increase in those communities that are longer-term going to come online. So that's what gives us optimism for the second half of the year. In terms of the split in mix, I don't see a whole lot of difference there at this point. I think you are right, depending upon what's selling and how fast it sells, that can influence the whole equation. So that's part of the reason for the caution.

Jay McCanless -- Wedbush Securities -- Analyst

Got it. The mix [Technical Issues]

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

Correct.

Jay McCanless -- Wedbush Securities -- Analyst

Thanks for taking my question.

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

Sure thing.

Operator

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

Buck Horne -- Raymond James -- Analyst

Hey, thanks. Good afternoon, guys. Congrats on the strong results. And I just wanted to talk maybe a little bit about your spec strategy going into the spring, given the visibility of demand you have earlier in the year right now and obviously the accelerated land spend and you get the higher -- the success of the Seasons and the absorption rate. Would it make sense to toggle up your back home starts into the spring time or how do you think about potentially putting two more starts in the ground ahead of the spring selling season?

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

You know, I think right now we've got plenty of units in backlog that we need to start, in fact, to start the year, the percentage of houses that are started in our backlog is a little bit lower than a year ago. So I think that provides plenty of work for our subcontractors. And I think to the extent that we try to employ the spec strategy on top of that. It might only serve to diminish what we're getting for those who are already in backlog. So I think we're going to stick with our strategy and really focus on whether or not we can improve our cycle times for those buyers in backlog and increase our backlog conversion rate.

Buck Horne -- Raymond James -- Analyst

Okay, that's helpful. And certainly you would be success of -- in having the backlogs for the year is much higher. As we think about any sort of incentive plans or stock comp for 2020, should we think about that in the SG&A outlook for the coming year? Anything that would be significantly higher year-over-year?

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

I think for the entire year there is nothing that leads me to believe that right now. I know that the compensation committee has not finalized those plans for 2020 yet. So that's an asterisk to that statement.

Buck Horne -- Raymond James -- Analyst

Okay, thanks. If I can sneak one last one in, just do you have any thoughts on the effective tax rate for 2020, with the tax credits extended?

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

Well, I think without the tax credits, you might be kind of in that 25% to 26% type of range. So without discrete items we consider those tax credits to be a discrete item. And kind of going back to Steve Kim's question earlier that that $3 million to $4 million of gross tax impact over the course of the entire year is probably the best estimate that you can use at this point.

Buck Horne -- Raymond James -- Analyst

Okay. All right, thanks.

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

Sure thing.

Operator

[Operator Instructions] The next question comes from Alex Barron from Housing Research Center. Please go ahead.

Alex Barron -- Housing Research Center -- Analyst

Yes, thanks. Yeah, hey Bob. I wanted to ask, you gave us kind of a range for expected average price this quarter. Is it reasonable to expect this could be the high for the year and it would trend lower as your mix continues to move toward more affordable homes?

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

You know with -- in fourth quarter it was already 62% as affordable. And having already seen some mix shift to Phoenix and Orlando. It might move down slightly, but we don't see it moving too far below 450.

Alex Barron -- Housing Research Center -- Analyst

Got it. And so, OK. So you said entry-level were affordable, it is now 62%. Okay. I think that's all I got for now. Thank you.

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

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Martin, Chief Financial Officer for any closing remarks.

Larry A. Mizel -- Chairman and Chief Executive Officer

This is Larry. I'd like to thank everyone for joining our fourth quarter earnings call. On behalf of our management team, I would like to thank our Board, our employees, our subcontractors and all of our other stakeholders, who made MDC's success possible in 2019. We look forward to speaking with everyone again, following the release of our first quarter 2020 earnings. Have a great day, everyone.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Derek Kimmerle -- Director of SEC Reporting

Larry A. Mizel -- Chairman and Chief Executive Officer

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

Stephen Kim -- Evercore ISI -- Analyst

John Lovallo -- BofA Merrill Lynch -- Analyst

Alan Ratner -- Zelman & Associates -- Analyst

Margaret Jane Wellborn -- JP Morgan -- Analyst

Paul Przybylski -- Wells Fargo -- Analyst

Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Buck Horne -- Raymond James -- Analyst

Alex Barron -- Housing Research Center -- Analyst

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