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MDC Holdings Inc  (NYSE:MDC)
Q4 2018 Earnings Conference Call
Jan. 31, 2019, 12:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the M.D.C. Holdings 2018 Fourth Quarter Conference Call. All participants will be in listen-only mode. (Operator Instructions) after today's presentation there will be an opportunity to ask questions. (Operator Instructions) And please note that today's event is being recorded.

And now, I'd 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, William. Good morning, ladies and gentlemen, and welcome to M.D.C. Holdings 2018 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 the question-and-answer session, at which time we will request the participants to 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 2018 Form 10-K, which is schedule to be filed with the SEC later 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 the full year 2018 and provide an update on our businesses. 2018 was a banner year for MDC as home sale revenues increased 19%, gross margins expanded 170 basis points and pre-tax income rose to its highest level in over a decade.

In addition, we ended the year in excellent financial condition with the homebuilding debt-to-equity ratio of 39% and a net homebuilding debt-to-capital ratio of 24%. Our liquidity grew by 18% year-over-year to $1.47 billion, following the $300 million increase in our homebuilding line of credit to $1 billion in November.

Furthermore, we delivered on our goal of the 10% active community count growth to start 2019. Our performance in the fourth quarter of 2018 also had its share of operating highlights, resulting in significant year-over-year increases to our top and bottom line results.

However, like most in our industry we experienced a slowdown in our absorption pace during the quarter. Part of this slowdown can be attributed to the normal seasonality associated with our business.

But other important factor is that the cost of home ownership has increased over the last few years causing buyers to become more deliberate in their decision-making process. This dynamic has been more pronounced for buyers looking for homes at a lower price point as years of price appreciation in both the new and existing home markets have made affordability a real issue.

Fortunately, we recognized this trend several years ago and began to reposition our company toward more affordable product. Those of you who attended our Investor Day last November got to see firsthand our Seasons and Cityscape home collections, which feature the same high-quality MDC construction and design, but with a higher density and smaller square footage. These more affordable price communities have been well received in a number of our markets and will make up a greater percentage of our business in 2019.

In terms of the overall health of our industry, we continue to believe that there is a need for additional housing in this country given the undersupplied nature of the housing market and the expected growth in household formations. Despite the recent slowdown in order activity, the leading demand indicators for our business are trending in the right direction, with rising wages, continued job growth and positive consumer sentiment providing a healthy economic backdrop. While movements in interest rate may have a near-term impact on demand, we know that these fundamental drivers are more important to the long-term success of our industry.

In light of these continued positive factors, we were very active on the land acquisition front in 2018, increasing our year-end lot supply by 20% and growing our active community count by 10%. Many of these new communities were in line with our more affordable product focus that delivered great results for us in 2018 and we believe that this market segment will again be an area of strength for the company in 2019. While our average selling prices will trend down as a result of the mix shift, we expect that the more affordable segment will continue to outperform the broader market.

Despite the uncertain demand picture, we have great optimism for our company as we head into the spring selling season. Our product is aligned with current market trends both in terms of price and new home features. Our financial service segment is well equipped with -- to work with customers to find the right financing alternatives, and our Home Galleries have a wide selection of options and upgrades for our buyers to customize their homes.

In addition our balance sheet is in excellent shape which gives us the financial flexibility to further our growth plans and withstand further slowdown. Our dividend payout is unsurpassed in the industry and we intend to continue to return capital to shareholders in this manner.

Just this week, our Board of Directors approved another $0.30 quarterly dividend payment as well as a special 8% stock dividend to our shareholders. Given these positives, we believe that the future is bright for our shareholders and our company. With that I'd like to turn it over to Bob who will provide some additional information on our results.

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

Thanks Larry and good morning everyone. As reported our pre-tax income for the fourth quarter increased by 34% year-over-year to $69.3 million. Note that this included $6.9 million of losses on investments in equity securities, published in our financial services segment compared to a loss of less than $100,000 in the 2017 fourth quarter.

At the end of the year, we still hold most of the investment in equity securities that generated the loss. However due to a change in accounting rules starting in 2018, we now recognize any loss or gain on equity securities even if it is unrealized at the end of the period.

Our fourth quarter pre-tax income was also negatively impacted by $10 million of inventory impairments compared to only $600,000 a year ago. Excluding investment losses and inventory impairments, pre-tax income was up 64% year-over-year to $86.2 million.

On an after-tax basis, net income improved by 123% to $54.7 million for the quarter. Our tax rate dropped from 52.6% to 21% for the 2018 fourth quarter which was a big factor in our net income increase.

The decrease in rate was mostly the result of a net impact of the Tax Cuts and Jobs Act which reduced the federal corporate tax rate from 35% to 21% and also resulted in a $10 million tax charge in the fourth quarter of 2017 to reduce the carrying value of our net deferred tax assets, due to the reduction in the federal tax rate.

For 2019 we are estimating an effective tax rate between 24% and 26%. This is higher than the effective tax rate for 2018 as it does not include any benefits from the Section 45 L Energy-Efficient Home Credit which reduced our 2018 tax rate by nearly 500 basis points, but is not expected to impact our 2019 results.

Our home sale revenues for the 2018 fourth quarter were up 22% year-over-year to $858.5 million due to a 17% increase in the number of homes delivered and a 4% increase in the average selling price of these homes.

Our backlog conversion rate was 49% which was above the expected range for Q4 that we discussed in our previous call and higher than 45% from a year ago. This increased backlog conversion rate is partially responsible for the 7% year-over-year decrease in homes and backlog to end the period.

Colorado the most significant year-over-year improvement in backlog conversion as the prior year was adversely impacted by the joist issue we discussed at length in the second half of last year. On the other hand, our Northern California and Phoenix markets had the most significant decreases based on labor constraints that increased cycle times in these markets.

Looking forward to the first quarter, we are targeting a backlog conversion rate in the 42% to 44% range compared with the 40% backlog conversion range we achieved in the first quarter of 2018. The year-over-year increase in our average selling price from last year was primarily driven by price increases across our markets in the first half of 2018. It is worth noting that our selling price has come down from a recent quarterly high of nearly $500,000. The decrease is in part due to the continued expansion of our more affordable Seasons Collection, which grew to 19% of closings for the fourth quarter versus only 9% a year ago.

Our gross margin for home sales was up 80 basis points year-over-year to 18.1%. Excluding the impact of impairments from both periods, our gross margin from home sales was up 190 basis points to 19.3%. All of our homebuilding segments realized a year-over-year improvement in their pre-impairment gross margin from home sales with the West segment showing the largest improvement and the Mountain segment showing the highest absolute level overall.

The impairment for the 2018 fourth quarter occurred mostly in one community in our Oregon market. This was our first unity acquired and opened in our Oregon market and it was negatively impacted by slower than expected sales at a higher-than-average price point as compared to the local market. Additionally, the subdivision incurred unexpected costs as we had not previously built homes in the Oregon market.

Our gross margin and backlog to end the quarter remained healthy at a level comparable to the 2018 full year gross margin excluding impairments of 19%. However, it should be noted that the gross margin level we actually realized in future periods could be impacted by cost increases cancellations price or incentive changes impairments reserve adjustments and other factors. With home sale revenue increasing by 22% year-over-year we are pleased to see our fourth quarter SG&A rate drop by 70 basis points to 10.9%.

Our total dollar SG&A expense for the 2018 fourth quarter was up $12 million from the 2017 fourth quarter. Similar to prior quarters this was driven mostly by an increased compensation cost coupled with increased commissions expenses driven by a higher level of closings.

Our last 12 months pre-tax return on equity is up 80 basis points year-over-year to 17.7%. However, excluding investment sale gains and losses which are not a core part of our business pre-tax return on equity rose by 510 basis points year-over-year, because of the expansion of our gross margin and our improved operating leverage, our homebuilding operating margin defined as gross margin from home sales minus our SG&A rate grew by 160 basis points year-over-year. Excluding impairment charges the increase was 260 basis points.

The dollar value for our net orders decreased 21% year-over-year to $453.3 million driven by a 15% decrease in our unit net orders and a 7% decrease in our average selling price. As previously discussed, our 2017 fourth quarter saw only a 1% decrease in net new orders compared to the 2017 third quarter.

Our 2018 fourth quarter saw an 18% decrease in net new orders from the 2018 third quarter which is more in line with the 20% seasonal decline we typically experience.

We continue to see our more affordable Seasons Collection comprise a larger percentage of our overall net new orders accounting for 28% of our total for the 2018 fourth quarter compared to just 14% a year ago. The increased prominence of our more affordable product across most of our markets contributed to year-over-year decrease in the average price of our net orders.

Additionally, we saw a shift in the mix of our net orders to Arizona and Florida which are the two states in our operations with the lowest average selling price. Our monthly absorption rate was 2.18 for the quarter, down 20% from the same quarter a year ago. This decrease was partially offset by a 7% increase in our average active subdivision count. Notably, the decrease in our absorption rate was not across all markets.

In Arizona, Nevada and Florida, we actually experienced a year-over-year increase. In contrast, California, Washington and Colorado saw the steepest decreases. Cancellations as a potential to gaining backlog increased to 14% from 10% a year ago. Given no uncertain conditions most of our markets experienced an increase to some degree with the exception of Arizona where demand has been strong relative to our other markets.

We ended the year with an estimated sales value for our homes and backlog of $1.43 billion, which was down 11% year-over-year. The decrease was driven primarily by a lower number of homes in backlog impacted by the combination of a softer sales quarter with a stronger closings quarter. The average selling price of homes in backlog was down 4% year-over-year to $485,700 compared with the record high $507,000 at the end of 2017.

Active subdivision count was at 166 at the end of the 2018 fourth quarter, up 10% from 151 a year ago. The West and Mountain segments accounted for the year-over-year growth offset somewhat by modest declines in the East segment.

Looking at the graph on the right, we increased the number of soon-to-be-active communities for the third consecutive quarter and now have 14 more communities soon-to-be active versus soon to be inactive which gives us some optimism about the trajectory of over active subdivision count going into the spring selling season.

We controlled 23,187 total lots to end 2018 with about 30% of those under option. As Larry mentioned earlier, we are in great shape to start the year as this lot count exceeds the prior year by 20%. However, relative to the end of the third quarter our lot supply was down 7% which is the first sequential decrease we have seen in eight quarters. The decrease is largely due to a more cautious approach to new subdivisions which resulted in a 42% decrease from the lots we approved for acquisition to 1,477 in the fourth quarter.

Also in some cases, we made the decision not to proceed with scheduled land transactions that had been previously approved. That said, we did move forward with a significant number of land transactions. For the 2018 fourth quarter, we acquired 2,471 lots for roughly $215 million with an additional $85 million of spend on development costs. Approximately 61% of the lots acquired in the fourth quarter were finished lots.

Even with $300 million in total land spend during the quarter, our liquidity was a robust $1.47 billion at the end of the quarter, up 18% year-over-year. Our strong financial position continues to be the keystone of our model providing us with the flexibility to operate effectively in a more volatile market environment.

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

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) And today's first questioner will be John Lovallo with Bank of America. Please go ahead.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hey guys. Thank you for taking my questions. The first question is can you talk a little bit about the incentive environment for the industry through the fourth quarter so maybe on a monthly basis? And then how that may have changed in January?

And then on top of that how is MDC, kind of, reacting to an environment where incentives have picked up? I mean do you intend to maintain volume or are you kind of maintaining price a little bit more? I mean how does that balance out?

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

Yes, I don't know that I have it month-by-month, but we certainly saw some uptick on the homes that we sold in the fourth quarter, especially on spec homes. So, I think there is that data point out there.

With regard to moving forward into the first quarter, I think we're going to continue to try to establish a reasonable balance between pace and price. I don't think it's appropriate to say that we're going to hold fast on one or the other. It's a subdivision-by-subdivision analysis. And if necessary, we'll increase incentives to drive some pace.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful Bob. And then maybe just touching on your comment regarding a slightly more cautious approach to land transactions in the quarter. Is this reflective of concern about the overall market or is this kind of more indicative or reflective of what you guys have accomplished already over the past few quarters in terms of land?

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

I think it's a lot of the latter. I mean we added on a lot of subdivisions that were approved by our asset management committee and whenever we have a period of time where things are a little bit more volatile. You take stock of any dollar that you're going to put into new assets. So, that's really what we're doing during the quarter. As I mentioned, we still spent about $300 million on overall land expenditures during the quarter and that's actually a high watermark for the past couple of years.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks very much guys.

Operator

And the next questioner today will be Nishoo Sood with Deutsche Bank. Please go ahead.

Timothy Ian Daley -- Deutsche Bank -- Analyst

Hi, this is actually Tim Daley on for Nishoo. Thanks for the questions. So, my first one is regarding the commentary on the gross margin and backlog. So, the last three quarters the commentary that you provided in regards to the backlog margin has pretty much come in line with what you've ended up reporting in a couple of months after.

So, just trying to understand what -- obviously you mentioned that that number could go lower due to changes in incentives or other structures. So, just curious as to what was the order of magnitude shift in the incentives or commissions that you're offering on homes sold in 3Q or 4Q?

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

From 3Q to 4Q, its right around on homes sold, right around 150 basis points. Keep in mind though for Q4 that included a heavier concentration of sales of spec inventory at the end of the year. And as I mentioned, it's spec inventory that tends to get a greater discount when it gets to be a little bit older.

Timothy Ian Daley -- Deutsche Bank -- Analyst

Understood. All right. No, that's very helpful. And then I guess thinking about the commentary -- some commentary that was made regarding on some specific markets. So I know you noted that Arizona demand has been strong and then also said that Arizona had some of your lowest-priced product that you offer across United States. So just curious in the community count growth that we expected in the year and then kind of closed out the year, is this where you anticipate the growth will be? And I guess where are you looking for future community count growth specifically related to the entry level?

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

I think we would like to see it in all of our markets. It'll happen to a different degree depending on the opportunities that we see in those individual markets and the individual market performance. So much of where you see it will be dependent upon how those markets perform.

Timothy Ian Daley -- Deutsche Bank -- Analyst

All right. Thank you.

Operator

And our next questioner today will be Michael Rehaut with JPMorgan. Please go ahead.

Maggie Wellborn -- JPMorgan -- Analyst

Hi. This is actually Maggie Wellborn on for Mike. Thanks so much. I was wondering if you could talk a little bit about how orders in fire traffic trended throughout the quarter and if you could give any color to how those are shaping up through January?

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

Yes, well, for us just on a month-by-month basis we saw that orders were down year-over-year by about 20% in October, down only 4% in November and then down again about 20% in December. And I think we started to feel a little bit better about where things were going in December started to see a little bit of pickup in demand. Then going into January, we feel good about January. Although, the month is not yet complete, demand has been better in January.

Maggie Wellborn -- JPMorgan -- Analyst

Okay. Great. Thanks, guys

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

Thank you.

Operator

And the next questioner today will be Stephen East with Wells Fargo. Please go ahead.

Paul Przybylski -- Wells Fargo -- Analyst

Thanks. Actually this is Paul Przybylski on for Stephen. Following on that last question Bob on the January demand trends, is that up year-over-year just normal seasonality?

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

I don't want to give it a exact number at this point just because the month is not yet through. But I think when I'm thinking about it, I'm thinking about it in terms of the year-over-year variance relative to the year-over-year variance that we experienced in Q4 of 2018 in terms of being better.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. Okay. And then looking at the absorption decline in the mountain region was that primarily due to move-up communities or was it -- be comparable across a pricing spectrum?

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

I don't think we delineated between the two. I think that the danger in trying to get too scientific about that is that if you're looking at a buyer that's more in the affordable category that buyer tends to be a little bit more sensitive to a great number of things and therefore more susceptible to cancellations in general.

And therefore that can impact the overall order rate for that group and other groups. I think for us certainly we saw a little bit of weakness just really in a number of different areas just generally for the Q4 period.

Paul Przybylski -- Wells Fargo -- Analyst

Okay. Thank you, appreciate it.

Operator

And the next questioner today will be Alan Ratner with Zelman Associates. Please go ahead.

Alan Ratner -- Zelman Associates -- Analyst

Hey guys. Good afternoon. Thanks for taking my questions. Bob just on the spec count, I know you guys are not big spec builders, but it's up over 40% year-over-year finished specs almost double where it was a year ago. Is that something that's being done by design, maybe to compete against some of the other more entry-level focused builders, or can you just talk a little bit about what the thinking is there on the spec side?

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

It's not by design. We have not changed our operating model or our principles with regard to spec count. I think a couple of things. First of all, we're adding on subdivisions and that's adding to the spec count as -- oftentimes at the start of a community you get a couple specs that you start alongside the models.

And then two, our cancellation rate was a bit higher in Q4 than it was a year ago. And some of those cancellations happened a little bit later in the process.

Alan Ratner -- Zelman Associates -- Analyst

Got it that's helpful. And then just kind of tying that a little bit to the January commentary and results, can you talk a little bit about what you've done on pricing so far? Has there been an effort maybe to clear through some of those specs. and maybe that's part of the improvement you're seeing on the order front, maybe some more incentives there, or have you actually been seeing some firming up or stabilization on pricing? And maybe even increases in some communities where demand is picking up stronger?

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

I mean I'd hesitate to say too much on that front, not being all the way through January. I don't think -- I guess given that, we're feeling a little bit better about where demand is in January relative to where it was in Q4 that's supportive of more stability in pricing, but we've got a long way to go in the spring selling season.

Alan Ratner -- Zelman Associates -- Analyst

Got it. Okay, thanks. Good luck.

Operator

And our next questioner today will be Jay McCanless with Wedbush Securities. Please go ahead.

Jay McCanless -- Wedbush Securities -- Analyst

Hey good afternoon everyone. First question I have the guidance that you all talked about at the Analyst Meeting in November, is that still valid or should we just go with what you gave on the quarterly side for 1Q?

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

Well, I think you're talking about the targets that we freshed in our presentation during our Investor Meeting. And I would say that those are certainly aspirational targets and they certainly are still possible, but they are highly dependent upon what happens during the spring selling season.

Jay McCanless -- Wedbush Securities -- Analyst

In terms of your community count, I'm guessing that you're walking away from some land deals during the quarter. Are you feeling like it's going to be up this year and what land did you decide to walk away from or was it move up versus entry level et cetera?

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

I guess first of all, in terms of the community count, I think the best thing to look at there is our soon-to-be active versus soon-to-be inactive. We had 38 soon-to-be active and 24 soon-to-be inactive. So as it stands as of the end of the year end of 2018 we are in good position short term to increase our community count. Where it goes from there will really depend upon what happens in our observations on demand for the remainder of the year and therefore our appetite to take on additional land onto the balance sheet. That said, we're starting the year with 20% more lots under control. So that is a good sign that we have the optionality to potentially increase our community count.

Jay McCanless -- Wedbush Securities -- Analyst

Then on gross margins some of your competitors have talked about starting to see some benefit this quarter and into next quarter for lower lumber prices. How is that looking for you all and when do you expect to see some assuming that lumber prices stay low when do you assume to see some type of gross margin tailwind now?

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

I presume yes we are seeing the same sort of improvements. It will typically occur on any starts that have occurred maybe late, late in 2018 early in -- starting early in 2019. So then from there it's about the cycle for whatever community or division you're operating in. So call it over the next two to three quarters.

Jay McCanless -- Wedbush Securities -- Analyst

Okay. Thanks for taking my questions.

Operator

And our next questioner today will be Ken Zener with KeyBanc. Please go ahead.

Ken Zener -- KeyBanc -- Analyst

Good morning, gentlemen.

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

Good morning.

Ken Zener -- KeyBanc -- Analyst

So Bob I do appreciate you talking about seasonal order pace this 20% that you talked about. I'd find -- I think it's a very important metric that people should focus on. And surprisingly, you guys did very well compared to your peers. One of the things that we noticed is the companies that do have more spec they are able to get more intra-quarter closings. I'm not saying that you guy are changing your strategy but did you have more intra-quarter order/closings than normal? Did that account for some of your good performance where many other builders obviously missed with normal seasonality?

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

Are you talking with regard to sales or closings?

Ken Zener -- KeyBanc -- Analyst

Well, orders which -- so orders, yeah which is also saw a fall in the closings when they are spec. It just seems like you guys did so well really a stand out quarter versus other companies?

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

I mean, I think there was a little bit more spec sales relative to the overall number of sales whereas typically it's about 20% spec sales in any given quarter. In the fourth quarter it was about 27%.

Ken Zener -- KeyBanc -- Analyst

Okay. Good. I appreciate that detail. Now realizing, I have two questions and so if you're up you talked about a 14% -- 14 increase count in community ready-to-be-opened versus ready-to-close. If you were to take 14 and just layered on to your base of 166 in 4Q it doesn't with your increase in lot count it doesn't sound like a 10% increase in community count 4Q 2019 versus 4Q 2018 is aggressive would you agree with that word just so we have some directionality?

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

I mean. I think what you're saying is we have a really good start to that -- to an increase. So I would agree with that. But again it's heavily dependent upon what we do for the remainder of the year.

Ken Zener -- KeyBanc -- Analyst

So these are finished lots that you can choose to take down? I mean, it's -- just as a builder, it seems like a lot of optionality for lots versus community count. I mean, just -- it takes a lot to build that model home and that. What creates that variance in your mind I guess, if you can help us out with that?

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

The variance in where it may end up?

Ken Zener -- KeyBanc -- Analyst

Correct yes.

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

I think I get your question. Yes I mean, there is certainly finished lot acquisitions that we could partake in, in Q1 or Q2 that could produce sales by the end of the year, could produce new communities by the end of the year. And for us if for whatever reason even though we're feeling better about where things are in January if that doesn't continue into February and March we're less likely to do those finished lot deals.

Ken Zener -- KeyBanc -- Analyst

Okay it sound like good traditional MDC risk taking. The last question on you talked about -- as I heard your response to a question regarding incentives in 4Q, which I heard you responding to that 150 basis point increase in incentives relative to a question of incentives to margins. I mean, we've seen that from other builders. Is that aggressive if we were to take your description of increased incentives and look at that as a sequential compression in gross margins? Because you obviously didn't compress any margins in 4Q so...

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

Well I mean, that's on sales sequentially from Q3 to Q4. And of course Q4 is our lowest period for sales and that would be incorporated into our backlog as of the end of the year. So, it's tough to extrapolate that into the entire year of 2018 or even Q1 since there is so much other backlog there already.

Ken Zener -- KeyBanc -- Analyst

Good point. Thank you very much.

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

Thank you.

Operator

And today's next questioner will be Stephen Kim with Evercore. Please go ahead.

Stephen Kim -- Evercore -- Analyst

Thanks very much guys and good quarter. Wanted to talk to you about the SG&A. It popped up a little bit more than we were expecting and just was wondering if the increase we saw there was anything there that may have been tied to preparing communities or something along those lines or was there something else that was in the combined SG&A figure this quarter?

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

Steve there were some ins and outs during the quarter, but nothing that really stands out to me. Our marketing expense is up a little bit year-over-year and that marketing line is a little more volatile now just because of the changes in ASC 606. But nothing that really stands out to me.

Stephen Kim -- Evercore -- Analyst

Okay. That's fine. In terms of the gross margin commentary in your backlog I think you talked about that pretty favorably. I guess the question here is you in the past talked about Seasons carrying a higher margin than, I think, your move up product or -- I think you meant that relative to your average at the time. And I was wondering, if Seasons continues to carry a better margin than your average and how that's kind of been trending recently?

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

I think the overall answer is, if we take a larger body of experience, that's the trend that we see. If you look at, for example, the full year 2018, Seasons is higher than our traditional. I get a little bit nervous about breaking it down for shorter periods of time, because you can have the impact of the mix between different areas of the country.

But I will say, we continue to think that the Seasons product and other affordable product, from a demand standpoint, there is more demand there. And I think whenever you have that, you've got a shot at potentially having a better situation from a pricing standpoint and therefore maybe a margin standpoint. On the other side of the equation, I know, that there's a lot of folks that are interested in doing more affordable products so there is more competition on the land side.

Stephen Kim -- Evercore -- Analyst

Last question with respect to some of the spec numbers that you talked about earlier. And you talked about it, it wasn't a delivered strategy or anything, you had cancellations and that sort of thing. One of the things we've observed is that -- I think Ken was alluding to this earlier, but I would go even a little further.

We've actually seen in some markets that, because consumers are not wanting to bear the expense of locking in their rates beyond, let's say, three months or so, that they're actually preferring spec inventory at this -- in this particular pocket of time, perhaps more than in other periods of time.

And it brings to my mind the idea that maybe you wouldn't need to incentivize your specs in this period of time quite as much as you might ordinarily have to. And I was curious if there was anything about the way you're managing your business that would allow you to capture that kind of a little bit of a difference in appetite for specs, versus what you would normally do, which is, obviously, discount in order to move your inventory once it reach a certain stage of completion.

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

Yeah. I don't know that there is anything specifically. I think, as far as the specs go we're really looking at them on a subdivision-by-subdivision basis and a house-by-house basis. And certainly, if you get some that are a little bit older, you tend to be in a situation where you have a regular motivation to get them off the balance sheet. For us, making sure we don't have too many is the best way to make sure that discounting on specs doesn't get out of control.

And while, certainly, I think you always, across a lot of industry, see bargain hunters out there for different kinds of product. When it comes down to somebody's house, I still think that there is a large number of people who really want to have a thumbprint on how their house looks, to be able to choose options and upgrades. And therefore, that still fits very well with our core strategy, even if there are some hiccups quarter to quarter.

Stephen Kim -- Evercore -- Analyst

Okay. That's fine. Well, great. Thanks very much, guys.

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

Thank you.

Operator

And our next questioner today will be Alex Barron with Housing Research Center. Please go ahead.

Alex Barron -- Housing Research Center -- Analyst

Thank you. I wanted to ask about the average sales price that you guys posted for orders this quarter it was quite a bit lower than, I guess $428,000 was quite a bit lower than what you have in backlog, what you have in delivery so far. So I'm just kind of curious if that's reflective or indicative of what we should expect for this year or was it just distorted a little bit by cancellations?

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

I think there is a little bit of distortion because of cancellations. I think there is part of it that's deliberate by virtue of the fact that we're doing more affordable product and then there is a mix element in that two of our most affordable markets, overall Florida and Arizona saw a shift in mix to those markets.

Alex Barron -- Housing Research Center -- Analyst

Got it. And then I guess just to circle back on the gross margins maybe I didn't hear it or understand it correctly. So you're saying the gross margins and backlog are comparable to the 19% posted for this year, but are you also saying, you don't expect much of a drop sequentially like most builders have guided to lower margins vis-A-vis incentives and discounts they were doing in fourth quarter, so I'm not clear if you guys expect the same.

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

I guess, I'm saying I don't know, so I'm just kind of giving you the fact of where we're at as of 12/31.

Alex Barron -- Housing Research Center -- Analyst

Got it. Okay. Thanks a lot.

Operator

(Operator Instructions) And the next questioner will be Buck Horne with Raymond James. Please go ahead.

Buck Horne -- Raymond James -- Analyst

Hey, thanks, good afternoon. Just thinking about your total overhead costs for the coming year. As your community count is up double digits now and looks like it's projected to continue going up, do you see the need to maybe invest in your overhead structure in advance of some of those community openings, will we see kind of overhead cost inflation run out a little bit in front of revenue growth for the time being?

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

I don't see that as much this year. I think we already did a lot of that last year and the year before as we were buying additional communities and doing other things to prepare for that growth. So, I would not expect that to a large degree as it relates to the overhead costs that are going through G&A.

Buck Horne -- Raymond James -- Analyst

Okay. Okay that's helpful. And just maybe a little bit more detail on the land impairment out in Oregon, just maybe a little elaboration on that and maybe describe what went wrong in that process? And was it more of a -- was it a miscalculation on that particular project, or was it something more systemic in the market that you misfired on?

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

Well, I think we're still getting used to the market. It's our -- it was our very first community, the first one we bought. Happened to be at a little bit of a higher price point and we talked a lot about how more affordable tends to be a little bit better right now. But I also think we're getting used to the subcontractor base as well, various fees in various municipalities and just having not done it before in that particular market, it leads to a higher chance for error, and I think that's what we saw in that market.

The good news is we've got other communities in that market. We did what we needed to do with that one and some of the other ones that we've opened recently are performing better.

Buck Horne -- Raymond James -- Analyst

Okay, helpful Thank you.

Operator

And there looks to be no further questions at this time, so this will conclude our question-and-answer session. And I would now like to turn the conference back over to Bob Martin for any closing remarks.

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

Great. Well, I appreciate everyone for being on the call today. And we look forward to speaking with you again, following the release of our results for the first quarter of 2019.

Operator

And the conference is now concluded. Thank you for attending today's presentation and you may now disconnect your lines.

Duration: 48 minutes

Call participants:

Derek Kimmerle -- Director of SEC Reporting

Larry A. Mizel -- Chairman and Chief Executive Officer

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

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Timothy Ian Daley -- Deutsche Bank -- Analyst

Maggie Wellborn -- JPMorgan -- Analyst

Paul Przybylski -- Wells Fargo -- Analyst

Alan Ratner -- Zelman Associates -- Analyst

Jay McCanless -- Wedbush Securities -- Analyst

Ken Zener -- KeyBanc -- Analyst

Stephen Kim -- Evercore -- Analyst

Alex Barron -- Housing Research Center -- Analyst

Buck Horne -- Raymond James -- Analyst

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