Taylor Morrison Home - Earnings Call - Q2 2019
July 31, 2019
Transcript
Operator (participant)
Good morning and welcome to Taylor Morrison's second quarter 2019 earnings conference call. Currently, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to introduce Mr. Jason Lenderman, Vice President, Investor Relations and Treasury.
Jason Lenderman (VP of Investor Relations and Treasury)
Thank you and welcome everyone to Taylor Morrison's second quarter 2019 earnings conference call. With me today are Sheryl Palmer, Chairman and Chief Executive Officer, and Dave Cone, Executive Vice President and Chief Financial Officer. Sheryl will begin the call with an overview of our business performance and our strategic priorities. Dave will take you through a financial review of our results along with our guidance. Then, Sheryl will conclude with the outlook for the business, after which we'll be happy to take your questions. Before I turn the call over to Sheryl, let me remind you that today's call, including the question-and-answer session, includes forward-looking statements that are subject to the Safe Harbor Statement for forward-looking information that you will find in today's news release. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.
These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the Securities and Exchange Commission. We do not undertake any obligation to update our forward-looking statements. Now, let me turn the call over to Sheryl Palmer.
Sheryl Palmer (Chairman and CEO)
Thank you, Jason, and good morning everyone. We appreciate you joining us today as we share our results for the second quarter of 2019. I'm proud to say we continued the momentum that we experienced at the end of the first quarter, which led us to successfully exceed expectations on our key operating metrics for the second quarter. Our performance in the quarter drove $0.76 of EPS, a 46% increase year-over-year, and a 39% growth in EBT dollars compared to the same quarter last year. We finished the quarter with 2,810 net orders on an average community count of 357, leading to an average sales pace of 2.6. This represents a significant increase over our pace of 2.3 in Q1 2019 and is flat against our difficult comp last year. Sales units were up 20% on a year-over-year basis.
Unlike the buildup of sales momentum through Q1 that saw sales paces increase every month, the Q2 sales momentum was strong and consistent throughout the quarter across all three months. Although our community count came in a little lighter than expected, most of that can be attributed to strong sales paces and early closeouts. Due to the solid spec sales environment during the quarter, we were able to deliver 2,594 closings, which is 30% higher than our results last year and above the high end of our guidance for the quarter. Home closings gross margin, inclusive of capitalized interest, was 18%, which was also above the high end of our guidance range for the quarter, primarily due to lower-than-expected incentives and some favorable mix impacts. EBT margin was 8.7% for the quarter, despite the inclusion of almost $4 million in AV transaction expenses and debt extinguishment charges.
We are thrilled with the results that we've seen so far this year and know that a large contributing factor to that success has been the hard work that the entire team has put into the integration following the acquisition of AV Homes. I'm very proud to announce that the heavy lifting required for the integration is complete, and we are now fully operating as one company. This has been achieved sooner than originally anticipated, with the only real lag being the sunset of some legacy AV units under production in our systems. The synergies from the deal are now running at what will be the annualized run rate. As you'll likely recall from our 2018 Q4 earnings, we took the synergy estimate up from $30 million to $40 million.
Now that we've completed all of the work and negotiations, we are pleased to be able to take that figure up to $50 million in annualized synergies. It has taken tremendous effort from our team members all over the country to get us to this point, which has manifested in the leverage in our SG&A line. We couldn't be more excited about our expanded business, including the open communities and future land pipeline acquired, but mostly the best-in-class talent that has joined the Taylor Morrison family. As we put the hard work of integration behind us, it's worth reinforcing how essential this has been to our overall Taylor Morrison strategy. As we've detailed in the past, it's really a focus on addressing the barbell of consumer groups that drive our business.
That barbell includes the entry-level buyer, which with today's changing consumer somewhat blurs with the first move-up cohort on one side, and the baby boomer consumer group on the opposite side. It's interesting that we often hear the correlation of Taylor Morrison as a higher price point move-up builder, when in reality, these barbell segments actually represent almost 90% of our closings. Having said that, we do appreciate that our entry-level business attracts a more financially secure first-time buyer, and our 55-plus business generally represents some of our higher price points as these consumers tend to have more discretionary dollars to spend on home site premiums and upgraded specifications. Certainly, the addition of the AV Homes communities will continue to bring our overall price point down in both of these consumer groups.
We pride ourselves on being a developer and builder that can opportunistically acquire prime land in core locations and successfully create distinctive communities that address the needs and wants of our targeted consumer groups. Also, most relevant with the strategic AV Homes transaction is our continued focus on gaining scale and overall market share within the markets where we operate. A key pillar of our growth strategy over the years has been utilizing M&A to grow in areas that otherwise could have taken years to achieve. With this most recent transaction behind us, we now have successfully completed five acquisitions since the end of 2012. In each case, we've paid relatively low book multiples to acquire these assets, with an average price to book multiple of 1.2 across the five deals.
This success in acquiring and integrating other builders has contributed to us almost doubling our total annual closings since 2013. An achievement that furthers our ability to hire the trades of choice and control cost has helped us become an employer of choice within our markets more broadly and has built overall brand recognition, ultimately benefiting our financial position and the relative returns on our capital invested. We continue to stay focused on adding scale in ways that make financial sense, and we believe that our track record has made us an acquirer of choice within the industry. Like any smart, dynamic business, we're always looking at potential opportunistic pursuits that are accretive to our core business model. This can be accomplished through new product offerings, a new market entry, new buyer segments, or even new business models that leverage a number of these.
Today, we are pleased to announce a strategic partnership with Christopher Todd Communities, a leader in delivering build-to-rent single-family housing communities. While the single-family build-to-rent community platform appears to be in its infancy, Christopher Todd Communities has been nationally recognized for their successful business model with active projects focused in Arizona and a robust pipeline of additional land dedicated toward future single-family rental developments. In this arrangement, Taylor Morrison will complement our core business serving as the land acquirer, developer, and builder, with Christopher Todd Communities providing its successful build-to-rent playbook, including community planning, improvement plan lineup, and property management oversight. Today's communities are comprised of single-family one- and two-bedroom rental smart homes with private backyards and even doggy doors. Each smart gated community has amenities such as a resort-style pool, fitness center with yoga, and an event lawn.
They are creating a new way to live, and we see the many advantages this strategic partnership brings us looking forward. Through this partnership, we have the unique opportunity to build on this established platform across the country in existing Taylor Morrison master plans, in newly acquired Taylor Morrison communities, as well as developing the significant lot pipeline that Christopher Todd Communities already has secured. To that end, we already have plans for three additional developments in the Phoenix area starting to break ground in late 2019 and even more on the horizon in 2020. In the next several years, the initial controlled pipeline is intended to deliver an excess of 2,000 new single-family rentals in Arizona alone, with plans to quickly expand nationally as we leverage the scale of Taylor Morrison's capital structure, land expertise, purchasing power, and building operations engine.
In reference to our earlier discussion on the consumers, one of the many reasons we're thrilled to announce this partnership is the clear alignment with our strategy to address affordability in our markets. In understanding prospective customers' needs and values, we seek opportunities to serve more people in our markets. Many of these consumers desire the product and lifestyle of a single-family community while balancing finances, flexibility, and maintenance-free living. Of note, there are approximately 16 million single-family rental homes in the U.S. today of varying age profiles, proving that there is demand for this lifestyle, yet the fast-growing new home production dedicated to the space represents less than 5% share, suggesting that it may be very early in the evolution of this exciting segment. Christopher Todd Communities enables us to serve more customers, flex our production builder muscles, and quickly serve demand for an increasingly appealing niche housing experience.
Taylor Morrison's entry into the single-family rental market advances our demand-side diversification while leveraging what we do every day in our core business. The strategy will further increase the velocity of community deliveries given known lease and construction rates for this simplified product. We expect to enhance our time and cost-efficient production process with proven and standardized specifications and a concentrated production line building process, creating a rapid land-to-lease-up pipeline. Our Taylor Morrison footprint, unique customer experience focus, and operational expertise is a natural alignment with the Christopher Todd Communities brand and community experience. We very much look forward to scaling this partnership, which will ultimately enable us to monetize the communities in bulk as we seek to optimize asset valuations, which are driven by cap rates and market dynamics.
We've consistently talked about the impact that scale can have on our business, and this is just another lever that we can use to expand our market presence. Now I'll turn the call over to Dave for the financial review.
Dave Cone (EVP and CFO)
Thanks, Sheryl, and hello everyone. For the second quarter, net income was $82 million and earnings per share was $0.76. Total revenues were $1.27 billion for the quarter, including home building revenues of $1.23 billion. Both of those figures are up about 29% from the same quarter last year. GAAP home closings gross margin, inclusive of capitalized interest, the impact from purchase accounting, and mix impact from AV closings was 18%. This result was flat to the rate we saw in Q2 of 2018. This exceeded our second quarter guidance as the mix of inventory homes sold and closed during the quarter was better than expected, with incentives materially lower than the same quarter last year. Moving to financial services, we generated approximately $23 million in revenue for the quarter and almost $10 million in gross profit, equating to a margin rate of 42.8%.
Our mortgage company capture rate for the quarter came in at 72%. SG&A as a percentage of home closings revenue came in at 10.1%, which represented 40 basis points of leverage when compared to Q2 2018. The addition of AV Homes is continuing to allow us to drive top-line leverage. Given our success in holding gross margins flat to last year and the SG&A leverage we gained, EBT margin came in at 8.7%. This represents about 60 basis points of improvement when compared to Q2 2018. As Sheryl mentioned, that was despite about $4 million of AV transaction expenses and debt extinguishment charges hitting during the quarter. Income tax totaled approximately $28 million for the quarter, representing an effective tax rate of 25.6%. For the quarter, we spent about $300 million in land purchases and development. At the end of the quarter, we had approximately 54,000 lots owned and controlled.
The percentage of lots owned was about 80%, with the remainder under control. As we have discussed, we expect to decrease that percentage of owned lots back down closer to our historical average. On average, our land bank had approximately 5.3 years of supply at quarter end based on a trailing 12 months of closings, including a full-year impact of AV. From a land pipeline perspective, we are almost exclusively focused on securing land for 2021 and beyond. At the end of the quarter, we had 5,051 units in our backlog with a sales value of approximately $2.5 billion. Compared to the same time last year, this represents an increase of almost 7% in units and an increase of 1% in sales value.
The differential in growth between units and value is being driven by our intentional shift in backlog ASP that's a result of our acquisition and the additional entry-level opportunity that came along with it. We also had 2,194 specs at quarter end, which included 440 finished specs. Before I give an update of our balance sheet, I'd like to discuss the details of the debt refinancing transactions we've completed over the last few months that we believe attractively positions our capital structure for years to come. In early June, we issued $500 million in eight-year senior notes with an interest rate of 5.78%. We used the net proceeds of this transaction along with cash on hand to redeem the $550 million in 2021 senior notes we had outstanding.
At the time, we paid down the total principal outstanding by $50 million to ensure that our total interest expense stayed as close to flat as possible given the prior 2021 notes had a slightly lower interest rate. We followed this transaction with an additional $450 million offering two weeks ago. These were eight-and-a-half-year notes with an interest rate of 5.75%. The net proceeds of this transaction will be used to redeem the $400 million 2022 6.58% senior notes that had previously been issued by AV Homes and which we acquired as part of the overall deal consideration. These notes had recently hit their first call period in May of this year.
As I mentioned before, we believe these transactions allowed us to take advantage of the historically low rates that we continue to see in today's market and allowed us to better position our capital structure for years to come by pushing our nearest senior note maturity out to 2023. It also moves all of our senior notes to an interest rate below 6%, with the average interest rate across all four sets just below 5.8%. From a liquidity perspective, we ended the quarter with approximately $717 million in total available liquidity. $197 million of that liquidity was cash on hand, and the rest is from our $600 million corporate revolver, excluding normal course letters of credit that have been issued against it. At the end of the quarter, we had no drawn balance on the revolver, and our net debt-to-capital ratio was 43%.
During the second quarter, we exhausted our most recent $100 million share repurchase authorization by acquiring 3.8 million shares for $76 million. Since the acquisition of AV Homes, we have acquired 16.9 million shares for $296 million, or an average price of $17.52 per share. This represents almost double the amount of shares that were originally issued as part of the transaction and an average price below where the shares were issued to complete the deal. Although we don't currently have a share repurchase authorization in place, it will continue to be a key part of our capital allocation framework. I'll wrap up by sharing our Q3 guidance. Closings for the quarter are planned to be between 2,200 and 2,400. GAAP home closings gross margin, inclusive of capitalized interest and purchase accounting, is expected to be in the mid to high 17% range.
Effective tax rate is expected to be about 25.5%, and the diluted share count is expected to be about 107 million. For the full year, we are increasing our anticipated closings to be between 9,600 and 10,100. Our 2019 absorption pace is expected to be consistent with our 2018 performance. GAAP home closings gross margin, inclusive of capitalized interest and purchase accounting, is now expected to be in the high 17% range, which is at the higher end of our previous guidance range. SG&A as a percentage of home building revenue that is now expected to be in the low 10% range, which is at the lower end of our previous guidance range. JV income is expected to be about 8 million, which has been reduced due to a delay at one of our JV communities in Southern California that is now expected to deliver closings in 2020.
We anticipate an effective tax rate of about 25%. Land and development spend is expected to be approximately $1.2 billion for the year, and we expect our diluted share count for the year to be around 108 million. I'll now turn the call back over to Sheryl.
Sheryl Palmer (Chairman and CEO)
Thank you, Dave. Before we move to Q&A, I'd like to take a moment to share a couple of current market highlights. As I mentioned in my opening statements, we saw a consistent sales pace throughout the quarter, which really speaks to the relative strength of the market during the spring selling season. It was also notable that we saw nice strength across all of our consumer groups through the quarter. Although the recent focus for many around the industry has been entry-level, it's worth noting that we have also seen significant strength in our move-up product lines as well. A telling example is one of our Austin communities. In the summer of 2010, we acquired a position of almost 1,200 lots in the Crystal Falls community. This would generally have been considered a move-up product for us aimed at affluent buyers.
Given the number of remaining home sites, we thought last summer that we had about seven years of supply left in our larger lot move-up positions. That said, with the paces that we've been able to achieve since then, we're actually going to be in a position to close out of that community in the first quarter of next year. Another example of a market that is seeing nice strength across all price points is Phoenix. We are obviously excited about the entry-level expansion that the AV Homes acquisition brought into this market, but they are also seeing strong demand at the move-up price points as well. There were actually three communities in the market that are all in very different areas of the valley, with price points in the mid-$650,000s that saw an average sales pace in the second quarter of nearly five per month.
This is a market where we've been able to diversify our product offerings across all price points and the major core regions within the city, and which our move into build-to-rent will further expand. I'd like to end our call today, like I always do, by providing an enormous and heartfelt thank you to the entire Taylor Morrison team for their efforts day in and day out to help us achieve our strong performance. I deeply believe our results are a testament to the passion and dedication of our team members across the country. With that, I'd like to open the call to questions. Operator, please provide our participants with instructions.
Operator (participant)
Certainly. Ladies and gentlemen, if you have a question at this time, please press star, then one on your touch-tone telephone. And if your question has been answered or you wish to remove yourself from the queue, you may press the pound key. And our first question comes from the line of Ivy Zelman with Zelman & Associates. Your line is now open.
Ivy Zelman (Executive VP)
Thank you and good morning. Sheryl, this is truly a grand slam performance for you guys. So really excited to see such strong results across all aspects, all metrics. So you guys should be extremely proud.
Sheryl Palmer (Chairman and CEO)
Thanks, Ivy Zelman.
Ivy Zelman (Executive VP)
Your commentary on really phenomenal performance. Just looking at the segmentation of the business, and I'd love to dig into build-to-rent a little bit more, but just first on the commentary around the move-up market and doing well across all segments. We've heard some different commentary, specifically on the move-up market and how it's more challenging. So is it really about part of the challenge we're hearing is that the existing homeowner is not willing to sell at the price that the market's willing to bear and that there's other factors and maybe it's more a function of sales in some of the markets that are exposed that you're not as prevalent in?
So I don't know, maybe give us some clarity on why you are seeing such strong performance and the market seems to be going the other way for the majority of the builders and even the real estate brokers that we talk with.
Sheryl Palmer (Chairman and CEO)
Yeah. No, I appreciate the question, Ivy. I think we've always said that it really does come down to very local positions and that quality of locations and really understanding the buyer early in the acquisition process is really going to deem your success. The time you take upfront in your underwriting, really understanding the supply demand and the attributes of that local market is really going to create the long-term success. And we've talked before about if you really understand your segmentation and you get your buyer right, we can see if you identify your most prevalent first and second buyer groups, we can see a margin that is somewhere between two and 400 basis points higher than if you have a miss. And sometimes communities bring along quite a blend of different consumer groups, but if you really have strong segmentation, you'd be amazed what you can see.
So I think when I look across the board, and I could have shared a number of examples across the portfolio, but we took two real critical markets and decided to share those. We really are seeing strength across all consumer groups. We're seeing it in the first-timer, as we've articulated. We're seeing great strength with the 50+ buyer, and we are seeing equally good strength. It's a smaller piece. That second move-up, as I said, is closer to 10%-12% of the overall business, but we're seeing some of our highest absorptions with that consumer group.
Ivy Zelman (Executive VP)
Very impressive. Quite the differentiation from the other builders and what we've seen so far. Moving to build-to-rent, Sheryl, maybe just with Christopher Todd, just to clarify, you're not going to retain the collateral, the home. They're going to operate what you build. And assuming you're doing that, if I'm correct, are the margins favorable to you on a net-net basis? How do the economics differ?
Sheryl Palmer (Chairman and CEO)
A couple of questions in there, Ivy. As far as the partnership, it is a strategic partnership. We've discussed for a number of years the supply-demand disconnect and overall reduction of rooftops. It doesn't matter if you're talking for sale or for rent based on affordability and consumer characteristics and preferences. The data really does suggest that we're moving toward this space. We believe there's a structural pivot in the space altogether and recently, and then I'll get to the specific deal points. Specifically, Urban Land Institute recently estimated that there's something like a need of 4.6 new rental units over the next 10 years to meet the demand. As far as the structure of the deal, you're going to see a number of strategic kind of partnerships within this. You'll see some that will be wholly owned.
You'll see some JV agreements depending on the asset. Actually, the first couple of assets that will build out will be in a JV relationship, and then we will move to owning the property wholly. From there, as I said, I think I said in my prepared remarks, we will assess the timing of the right time to exit the asset, but it is not our intention to hold the asset long-term. So we'll decide exactly the right time in the lease-up process to sell the asset to maximize pricing and returns, but I would expect it will be within a year of lease-up, and what I am confident is that the holding period of these assets will be significantly less than a typical Taylor Morrison community that we buy and operate today.
So long answer to tell you that initially you won't see units come through the P&L because they'll be in the JV structure, but then moving forward, we'll handle that on an asset-by-asset basis.
Ivy Zelman (Executive VP)
So just to follow on that, but that's very helpful. Appreciate it. So on exit of the collateral, the year later or whenever on lease-up, what would be the return profile relative to had you gone the traditional route in comparison? Any way you want to quantify that for us?
Dave Cone (EVP and CFO)
Yeah. Ivy, this is Dave. We think the return profile is going to be at or above where we are right now. We also see this as a way to just increase our overall scale when you get into the purchasing and the construction efficiency. Getting greater scale at the local level will improve costs. So we think net-net overall, this combined with our core business will enhance our overall returns.
Sheryl Palmer (Chairman and CEO)
Yeah. I pile on, Ivy, because obviously we're going to see efficiency through the process to generate the enhanced returns. We're going to see it through the land process, the quick turns on the building cycle. We're going to be able to dedicate land parcels within Taylor Morrison communities that we operate today to move through some long land assets that we have. So we're quite excited what this will do for the organization's return profile.
Ivy Zelman (Executive VP)
Sounds very exciting and accretive to your business, the bottom line. So congrats on the move.
Sheryl Palmer (Chairman and CEO)
I hope that to be the case. Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Carl Reichardt with BTIG. Your line is now open.
Carl Reichardt (Managing Director and Senior Equity Research Analyst)
Thanks. Good morning, everybody. The absorption pace is great, Sheryl, but I was curious if you could help us break out among different product types, entry-level, move-up, active adult, or however you want to do it, sort of the differentials over the quarter in terms of those absorption paces by product.
Sheryl Palmer (Chairman and CEO)
You know, Carl, like I said in Ivy's question, as I look across the business and the divisions, I would tell you that generally we saw similar paces across consumer groups. So I don't have any real standouts. It really does come to the specific expectation of a particular asset, but I would tell you that they all operated within two or three turns of our overall quarterly pace.
Carl Reichardt (Managing Director and Senior Equity Research Analyst)
Okay. Great. Thank you. And then back on Christopher Todd, can you talk a little bit about how they're capitalized? I recall, right, I think they've got some private equity backing and just sort of what their plans are for growth. Would you expect them to just work with you? Is it more exclusive or something that they might do more largely across other builders? I'm just trying to get a sense of their growth opportunity and how you can participate in that. Thanks.
Sheryl Palmer (Chairman and CEO)
You bet. Thank you, Carl. No, this is an exclusive strategic partnership with Christopher Todd and us, so the growth will come together. And as I said in my prepared remarks, we'll handle everything on the front end from the land acquisition, development, purchasing, construction, and they're going to be critical in everything from community design to oversight. We'll really be working off of their product and community design playbook. And then they'll also provide oversight for the leasing and property management pieces. But our growth, as I talked about, will really come through the initial land pipeline that they have secured today, new land that our land professionals across the country will identify, as well as looking at the assets that Taylor Morrison holds today.
Carl Reichardt (Managing Director and Senior Equity Research Analyst)
Thanks, Sheryl. I appreciate it.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Scott Schrier with Citi. Your line is now open.
Scott Schrier (Analyst)
Hi. Good morning and nice quarter.
Sheryl Palmer (Chairman and CEO)
Thank you.
Scott Schrier (Analyst)
To start off with another one on the Christopher Todd, I'm just curious, based on some of these comments, it sounds like maybe you're taking the risk on the construction part, on the yield-on-cost components. I'm curious how you think about that, and I don't know if there's any parameters on how much capital you'll be investing initially. I know you also mentioned that you're going to be holding these communities for less than a year. Could there be situations that arise where the NOI maybe looks more attractive if the cap rates aren't really in the range that you want? Just trying to think about the flexibility of how you're thinking about that. And then on the land side, it seems like maybe some of this land could be land that is, I don't know if it's suited for an AV entry-level type product.
How do you think about land in the Phoenix market where you're so strong as far as pursuing it for your normal operations rather than the rental operations?
Sheryl Palmer (Chairman and CEO)
Okay. There's a few questions in there, Scott. Dave and I will probably tag team them. As far as the risk on the construction side, I don't think we actually see it that way. We see it as a true benefit given our muscle that we have as an organization. When we look at the production process, the product repetition, the concentrated line building cadence, honestly, this is a company and trade partner's dream. It's important to remember that we don't introduce the consumer into the building process, so it makes for a very efficient line building. You're going to build this in phases, so your risk would be no different from a capital standpoint. I would argue quite a bit less than you would see on the for-sale side. The next was as far as the land.
As I mentioned before, we will continue to burn through the assets that they have or under control, evaluate those assets, bring them on board, and then build them. But we'll build them based on market demand. One of the other interesting components of the transaction that we're quite excited about is really the strategic match on the consumer side. So far, Christopher Todd has seen in their communities about 50% millennials and 40% boomers. That allows us to really understand the natural alignment as we look at some of our own land holdings. As far as the timing, as I said, Scott, we will probably over the next few months really spend the time to determine the right time in the lease-up process when we look at tax advantages, when we look at highest and greatest value.
Will we sell those when they're 80% leased up, or will it be six months after you have a full property lease? So I think more to come as we get into the next quarterly call.
Scott Schrier (Analyst)
Got it. Thanks for that.
Sheryl Palmer (Chairman and CEO)
You bet.
Scott Schrier (Analyst)
And then I know that in the past, obviously, a couple of quarters, we've been focused on rates and what it's done, and I think a lot of the conversation is the potential to bring the entry-level buyers back into the market. But I'm curious more on the first-time move-up side of things. Do you think rates, is it something that's bringing buyers into the market, or do you think it's more of a tool that the buyer who's already committed to transact maybe now has more ability to pay for options, for lot premiums, potentially a larger model? And just what trends have you been seeing? Have you been seeing an uptick in things like lot and option premiums and things like that?
Sheryl Palmer (Chairman and CEO)
Yeah. Great question. And I would tell you of everything, Scott, it's probably a little bit of both. There are certain positions, more affordable positions, that absolutely the improvement in rates brought people back into the market. I think when you look at more of that first, second-time move-up, I think that really was about confidence. They wanted to buy. It was really about when. And then their confidence in the actual transaction and what they purchased and how much they specified in their homes. We've talked about for at least the last, I don't know, two and a half years of quarters around the spread that our buyers have to buy either a larger house or an interest rate that could be three to five hundred basis points higher. So it's not about if they could buy. It was really an emotional decision.
And yes, that did manifest itself with improvement in lot premiums, improvement in upgrades that we've seen across the business. So to answer that question, truly, you have to get into almost each individual community because the circumstances are different. But if I were to generalize, I would tell you at the more affordable price points, the movement in interest rates allowed people to buy and gave them more confidence. And in the move-up buyer, as you would expect, it gave them more confidence and allowed them to be a little bit freer with the checkbook.
Scott Schrier (Analyst)
Great. Thanks a lot for the color. Good luck.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open.
Michael Rehaut (Executive Director)
Thanks. Good morning, everyone, and congrats on the results.
Sheryl Palmer (Chairman and CEO)
Thanks, Michael.
Michael Rehaut (Executive Director)
First question was interested in getting a little bit more clarity on the directionality of the gross margins. Obviously, you had a nice result for the second quarter. You raised the full-year guidance. I guess for the third quarter, you're looking for margins to be down sequentially, maybe as much as 50 basis points, let's say. Just wanted to get the drivers of those because I think, broadly speaking, more builders than not are looking for things in the back half to benefit them around lower incentive levels, incentive levels that have declined in the first half of the year, helping them as well as lumber costs. So just trying to get a sense of the different puts and takes as you look at the back half.
Dave Cone (EVP and CFO)
Sure, Michael. We guided to mid to high 17%, and there's obviously a couple of things making that up. I think specific to us, there is a potential for some geographic mix that may cause some sequential decline in the rate. But also, we have the reducing benefit of purchase accounting from the AV transaction. That stepped down each quarter from the first quarter, so less benefit. In addition to that, we have the overall AV mix impact. As you might recall, the AV margin on the legacy side were a little bit lower, and it takes us about 18 months to build those up to the level consistent with the legacy TM side of the business. From a planning perspective around incentives, we anticipate incentives could be slightly up sequentially in Q3.
We are leaving a bit of room around incentives just for any potential pressure that we might see on trying to sell and close inventory homes in the quarter. So that's going to come down to overall market demand. As you mentioned, we saw some pretty good strength in the first half of the year, which helped us take up our annual guidance. So if I look at Q3, I would say that there's probably the potential to be at the high end of the range or even slightly above if we don't see incentives increase versus Q2.
Michael Rehaut (Executive Director)
And before I ask my second question, which will also be on the Christopher Todd relationship, which I find interesting, are you saying that you're just not sure about the directionality of incentives, or is there anything to make you think that incentives would go up? I'm a little confused if you said that it may not go up. You're baking in that it might go up a little bit. Just what's around that thought process?
Dave Cone (EVP and CFO)
Again, it goes back to, we're just leaving a little bit of room around moving through some of our finished specs. We've actually made really good progress from, at the end of the year, we were about 1.7 per community. We've worked that down to about 1.2. We'd like to see it a little bit closer to 2.1. Some of this is also to maintain some of the momentum of the strong pace that we've seen. So that's where we are around the mid to high. Again, this is just a component of it. Some of these drivers for us in the quarter are the geographic mix as well as the reduced benefit of purchase accounting.
Michael Rehaut (Executive Director)
Okay. Thank you. So then just on Christopher Todd, obviously, interesting partnership, and I can certainly see the demographic and customer diversification element to it, which is great. I guess I'm trying to get a sense of the ultimate size of what this could be. Someone asked before about the amount of capital dedicated to it. You're going to initially go through, I guess, JV structure. But any sense of kind of the number of units? I think you threw out a 2,000-unit potential across three communities in Phoenix. But maybe you could give us a sense of what amount of land you're kind of apportioning for this relationship and how big it could be over the next couple of years, either from a capital investment side or a unit side?
Sheryl Palmer (Chairman and CEO)
Okay. So we'll give that a shot, Michael. I think on the capital side, very simply, we'll just say it's going to be pretty much all within our planned budget.
Dave Cone (EVP and CFO)
It's going to be within our budget, so the $1.2 billion that we've guided to this year, it'll be there. Likely, what you're going to see is about $25 million going out in the short term. That's going to flow through, though, the joint venture structure.
Sheryl Palmer (Chairman and CEO)
Yeah. And then we'll give you more color on the details of that, Michael, as we roll forward. Kind of bigger picture, how big this can be. As I said in my prepared remarks, and then I think one of the follow-up questions, I think the opportunity is relatively unlimited. We've been studying the space for quite some time and really have recognized what I would call a sea change in front of us on the traditional multifamily space. So it wasn't a difficult decision for us to enter into this space. It was really about how do we do it in the best way to play because we really believed in the strategy and the diversification, and it was incremental to the business. So over time, I think you'll see this.
If you look at the 4.6 million units that are estimated over the next 10 years, I think there's a lot of runway. If you look at what Christopher Todd is going to deliver in Phoenix in 2019, it's about 800 units. So if you look at the 2,000 units that they have controlled, you look at the opportunities within our land bank, and you look at the market expansions, I mean, we see this being a formidable size of piece of our overall business. I don't want to get ahead of ourselves. So let us get these first couple of communities open. We're going to learn a lot. We're going to learn a lot about the business model.
We're actually, I think, going to learn a lot more about consumer motivations and gain some additional insights on even preferred building science approach when you look at the simplicity of the building products there. And ultimately, it probably becomes a tremendous cross-marketing opportunity for Taylor Morrison. One of the stats that I really have enjoyed about learning about the business is their KPIs are quite impressive compared to what you would call the traditional multifamily. And their retention stats are really interesting. But 90% of the folks within Christopher Todd that don't renew, non-renewals, move for a home purchase. So I also look at it, as I said, as an interesting marketing opportunity for the company looking forward.
Operator (participant)
Thank you. And our next question comes from the line of Jack Micenko with SIG. Your line is now open.
Jack Micenko (Analyst)
Hey, good morning. You talk about ASP coming down, and that's been well telegraphed through the change in mix and serving a broader group of customers. But the pace, commentary, and the outlook is flat. And I guess the question is, we always think about lower ASP comes with a faster turn. I'm hoping you could reconcile those two when you put them together.
Sheryl Palmer (Chairman and CEO)
Yeah. I think that's a little bit of an. I mean, I agree. Intuitively, you would tie pace and price. But as I look across the company, some of our highest paces tend to be on the higher prices. You'll likely remember, Jack, that we had a very strong first-half pace of last year. So we are quite pleased with the paces that we've seen the first half of the year. And our guidance would suggest that we're going to be generally flat for the full year. And if you consider seasonality and the higher first half, that would make sense. As Dave talked about, ideally, there's a little room within our margin guidance that we're going to continue to really pivot toward pace. But we feel good about the guidance and generally a year-over-year flat number.
Dave Cone (EVP and CFO)
Yeah. I mean, I think back to the incentive level, overall, we feel good about the margin, which gave us the confidence that we could take up the annual. For the quarter, it's as much around geographic mix than anything. I'd also point you guys to, if you look at our quarterly performance over the last couple of years, from one quarter at the low to the quarter at the high, it's not unusual for us to have a 90 basis point swing. And again, that is driven almost entirely by geographic mix. So we feel good at where the incentive level are. And as Sheryl said, we're driving to flat pace year-over-year.
Sheryl Palmer (Chairman and CEO)
Just for what it's worth, if you look at the paces across the portfolio without diving into every division, as I said, Phoenix continues very, very strong. And that's a mix of all consumer price points. Behind that, my next strongest paces in the company are California. And you know what the price points are there. But that would be Sacramento, Southern California. And then on the opposite end of the spectrum, our paces that would be equal to California would be Orlando, where we have a very strong, affordable, active adult business. So that's the point. It's really across all price points, and you really have to dig under the skin of the business to understand it.
Jack Micenko (Analyst)
Okay. That makes sense. And then the second quarter here, one of the emerging themes seems to be those that had spec seem to sell them through faster at better margins, I think, than most of us expected going into the quarter. What do you think's driving that? Is that, I guess, the worry would be we're pulling forward some demand on rates. Is it a mix in that you've got more first-timers? So the spec product is more attractive. What do you think's driving that? Because it definitely seems to be a theme throughout the space this quarter.
Sheryl Palmer (Chairman and CEO)
Yeah. I think you have to look at it as the journey that we've been on. So think about where we were at the end of last year. People did, confidence dropped, rates went up. The question was, were there people sitting on the sidelines? Of course, there were. If you think about rates, if you think about tariffs, if you think about government shutdowns, it really gave people a pause. So I think you move into the first year, the first of the year, and what you had was a great deal of unintended inventory by the builders, if we were to be honest about it, because of what happened with the fourth quarter slowdown. Confidence started coming back. Job numbers were great. Interest rates fell. And there was great, let's call it, consumer opportunities because there was an abundance of inventory.
I'm not going to say it got out of hand. I'm certain there were some markets where incentives were stronger than others. It was absolutely a buyer's market, and there were folks sitting on the sidelines. I think as time has moved on and you've moved through the first half, you've moved more into what I would call a normal spring selling season, but one that got extended. I think it's gotten extended for all the reasons we've talked about. Lower interest rates certainly have been a benefit. We'll see what happens today. I expect that if everyone's crystal ball is accurate, we're going to see a 25 basis points reduction this afternoon.
Even though I think that's baked in, and I don't know that we're going to see a ton of movement on long-term rates, the consumer is going to feel even better about that. I think that's one of the things that gives us confidence about this elongated spring selling season.
Jack Micenko (Analyst)
Got it. So more catch-up than pull forward, it sounds like.
Sheryl Palmer (Chairman and CEO)
I think so.
Jack Micenko (Analyst)
Thanks for taking the questions.
Sheryl Palmer (Chairman and CEO)
You bet.
Operator (participant)
Thank you. And our next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is now open.
Mike Dahl (Managing Director)
Good morning. Thanks for taking my questions.
Sheryl Palmer (Chairman and CEO)
You bet.
Mike Dahl (Managing Director)
Nice results and definitely a lot of interesting on the Christopher Todd relationship, but as far as my questions, I'll stick to the core. I just want to understand the commentary a little bit more about the incentives. I get the forward-looking part about giving yourselves a little bit of a cushion as you kind of tweak your pace and price to deliver what's optimal for the second half, but I was hoping you could give us a couple more stats on what you have seen because I think Dave mentioned those incentives were down year-on-year on the specs in 2Qs.
Sheryl Palmer (Chairman and CEO)
Yeah. They were down a little. Right.
Mike Dahl (Managing Director)
Year on year. Okay. So can you give us what those levels were in both the closings and then, if possible, just some color on incentives and order trends in 2Q versus 1Q and also versus 2Q of last year?
Dave Cone (EVP and CFO)
Yeah. What we said was incentives for the Q2 deliveries, they were in line with Q1 and lower year over year. From a year-over-year perspective, they were down about 10%. And then as we look at where we were trending in Q2 on new orders, it was relatively consistent. Again, we're leaving just a little bit of room. So we're not seeing incentives necessarily tick up at this point. But as Sheryl mentioned and I mentioned, some of this is also leaving room just to be flexible on the pace side.
Sheryl Palmer (Chairman and CEO)
And I think what we really like about that stat that Dave just shared, when you look at the year-over-year and you look at when these closings for Q2 were sold, that would have been the back half of last year when things got a little tighter. And so you've got that as well as this abundance of spec inventory. And even with that, we saw that 10% reduction in our Q2 closing incentives.
Mike Dahl (Managing Director)
Okay. Got it. Yes. That's helpful. My second question is just around the community count, which is really kind of first-class problem flip side of selling at the better pace. You're closing out early. I know it's early, but just given you have visibility into your land pipeline, can you at least give us some sense of kind of directionally how we should be thinking about community count into 2020? Should we expect that you can see an inflection from where you're going to end 2019, or is it something that's still going to look a little flatter?
Dave Cone (EVP and CFO)
So I guess when we're looking out for 2019, we gave the guidance of 350-360. It is a little early for us to give a lot of detail on 2020. We'll do that, obviously, in the coming quarters. But our expectation is that we're going to continue to grow the business, and we'll see an uptick in community count.
Sheryl Palmer (Chairman and CEO)
Yeah. And the only thing I'd add on to that, Michael, is that as I look at the community openings that are scheduled for later this year and next year, that's always the most difficult thing for us to guide to and project because there's so many factors in getting communities open. But we have a lot of wonderful new product lines coming to market in the back half of the year, which should aid our community count in 2020.
Mike Dahl (Managing Director)
Okay. Of course. And yes, it's just good to hear that the plan is for growth, whether it's from absorption or community count. Understand the difficulty in predicting that there. Last one on my end, I guess last day of the month here, but anything you can provide in terms of commentary on July trends?
Sheryl Palmer (Chairman and CEO)
Yeah. Like you said, last day of the month, but we've got 30 days under our belt. And I would say that July is in line with our expectations and relatively consistent with kind of June, summer months. So we're happy and pleased with where the third quarter's starting.
Mike Dahl (Managing Director)
Great. Thanks.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Matthew Bouley with Barclays. Your line is now open.
Christine Cho (Managing Director)
Hi. Good morning. This is actually Christine Cho from Barclays. I wanted to ask about the synergy number raised to $50 million. What percentage of this is direct cost, and what percentage is SG&A? And can you also provide any updates on timing?
Dave Cone (EVP and CFO)
Yeah. So I guess to kind of go back on the story, our original number was $30 million. We increased that to $40 million in Q4. And then, as you know, this quarter, we finalized it at $50 million here in Q2. Our original breakdown had about two-thirds of that in the overhead, about a third of it broken out between mortgage, insurance, and national rebates. Really, the drivers that we've seen since the original number has been across all categories. But most notably, it's in the overhead and the national rebates. And some of the biggest benefit that we're seeing is also from the increased local scale. So we're seeing better costs there. So we're seeing it both at the national and the local level. I would say that's probably the largest increase.
From a timing perspective, we're going to see this really come into effect, and we'll get the annual benefit here in 2020.
Christine Cho (Managing Director)
Okay. Thanks. And then also, last quarter, you had mentioned that you raised prices in 40% of communities. Is there any update to that on what you're seeing in pricing power?
Dave Cone (EVP and CFO)
Yeah. We continue to see strength in pricing. Now, albeit they're at modest levels, but this last quarter, we saw it in a little bit more than half of our communities.
Christine Cho (Managing Director)
Got it. Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Truman Patterson with Wells Fargo. Your line is now open.
Truman Patterson (Analyst)
Hi. Good morning, everybody. And thanks for squeezing me in. I think I'll leave Christopher Todd alone for the moment and follow up with you offline. You all seem pretty committed to continued M&A. Could you guys just elaborate a little bit further? Are you seeing more deals start to open up? And are you really looking at smaller bolt-on deals or a little bit larger transformative deals similar to the AV Homes acquisition?
Sheryl Palmer (Chairman and CEO)
As Dave always says, when we look at M&A, it's part of our capital allocation process, and it really comes down to best use of cash. We're always looking. We are in a good place with the AV integration as we kind of bring that to the finish line. Our balance sheet, I think, is in really good place. When I think about the kinds of deals that are out there and that we're looking at, it's a combination of what are the books that are out there? And really, more importantly, what do we believe are the strategic opportunities for the organization? We actually go seek those opportunities. They come in different sizes. You can look at a lot of deals to get anything to get one to the finish line.
So we're always looking, as I think I've discussed before. It's really about finding something that's accretive to the business, that's got the right culture, that enhances the financial results of the business from a long-term strategic standpoint. And when I think about present activity in the marketplace, it feels like there was a little lull earlier in the year. And I think as you move into the summer months, bankers get a little bit more the activity picks up. But I don't think there's any real trend line on the books that are out in the market today. But we'll be in a position of readiness from both an operational standpoint and a balance sheet standpoint if that right opportunity presents itself.
Truman Patterson (Analyst)
Okay. Thanks for that. And then jumping over to active adult, it's nice to hear that the absorptions were kind of down in line with the overall company average, especially one of your competitors suggested that trends remain soft. Do you think you could break it out for us a little bit further between what you're seeing in the lower price point, AV Homes, active adult communities versus your legacy Taylor Morrison, a little bit higher price point communities? Are you seeing any delta there?
Sheryl Palmer (Chairman and CEO)
Yeah. Interestingly enough, the paces between legacy AV and Taylor Morrison, when I look at the second quarter, are pretty similar. In fact, I think that we saw AV with a slightly improved. I think it was one turn on the AV paces across the portfolio compared to the overall Taylor Morrison, which is exactly what we would expect. Specifically, your comment on active adult and a softness, when I look at kind of our largest division of 55+ communities, our paces were higher in Q2 2019 than they were in Q2 2018.
Truman Patterson (Analyst)
Okay. Thank you for that.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Jay McCanless with Wedbush Securities. Your line is now open.
Jay McCanless (Analyst)
Hey. Good morning, everyone. The first question I had on the Christopher Todd deal, I've been expecting one of the builders to jump into single-family rental or building for single-family rental at some point. But I would have expected maybe to go with a larger participant in the field. I mean, y'all have got AMH in your backyard, etc. Just maybe talk about the reasons for going with a smaller participant in that industry versus one of the larger names.
Sheryl Palmer (Chairman and CEO)
Yeah. It's an interesting question. As I said, we've been studying the space for quite some time and believe that strategically it made sense. And then it was about how do you go play. And after spending a good amount of time researching and really speaking to the different players in the space, for us, it was about aligning ourselves with the best in class and who we believed had the overall best playbook and platform and long-term potential. And so when you look at some of the players, it's about building individual units and groups of units or buying units. When you look at what Christopher Todd has created, it's about creating a different lifestyle community that really hasn't existed before. So we looked at, should we embark on this on our own?
We felt we were much better off leveraging our capital structure and core skill with someone that actually had the experience and reputation on community design and a product playbook, once again, and believes in delivering an overall single-family lifestyle community platform that is well aligned with what Taylor Morrison does, so it actually was a pretty easy decision, and let's grow and develop the business in the way that makes the most sense, and it's really about scale and share within our market and really controlling our destiny in community design, the construction scheduling, so all the things we've already talked about actually made Christopher Todd the perfect partner for us.
Jay McCanless (Analyst)
Got it. And the second question I had, I believe you all said earlier that you're keeping some room open on the incentive front vis-à-vis your gross margin guidance. What are you seeing from competitors? Are some people starting to raise incentives? Are you having to be a little more competitive maybe you were 30 or 60 days ago?
Sheryl Palmer (Chairman and CEO)
No. I don't think so. I mean, you're always going to find those pockets, and as you do, we do our tour around the country, and we just actually recently had that opportunity to be in every market. You're going to always hear about a builder that's gotten very aggressive, and they're looking for growth in a certain place, but I would say that overall, I would say it's business as usual.
Dave Cone (EVP and CFO)
Yeah. I think that's right. I mean, maybe a little bit out in some peripheral markets, you might see a little bit, but I would say everyone is acting very reasonable right now, and I think that just speaks to the strength of the market right now and the demand.
Jay McCanless (Analyst)
Good to hear. Thanks for taking my questions.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Alex Rygiel with B. Riley. Your line is now open.
Alex Rygiel (Analyst)
Sheryl, Dave, congratulations on a very nice quarter.
Sheryl Palmer (Chairman and CEO)
Thanks, Alex.
Alex Rygiel (Analyst)
Just real quick, any thoughts on the QM Patch and the possibility of it expiring?
Sheryl Palmer (Chairman and CEO)
It's a really good question, one that I haven't really heard much this earnings season. And we've been pretty vocal about our concern on the expiration of this patch. We've spent some time on the Hill. And the expiration date is, as you, I'm sure, know, January 10, 2021, which is very quickly going to impact new homes. We could be dealing with this as early as the first of next year as new buyers begin the mortgage process, and builders rely on that credit approval before the home even starts construction. If these buyers or borrowers are no longer eligible and builders are unable to rely on the approval, we do believe this will impact the business and families. We've provided our borrower profile statistics every quarter for a number of the years.
So the quality of our portfolio certainly doesn't affect us as much as it may others because they have the financial ability to withstand higher rates and credit tightening. But when you look at the big picture, it's 20%-30% of GSEs mortgage volume that could be impacted. Long story short, we're hopeful that regulators will appreciate all of the data that's available out there to redefine the definition without necessarily emphasizing a limiting percentage and really recognize that the qualification metrics should be wholly reviewed when you look at a consumer, and there's not one component of a consumer that makes them a good or bad credit risk. We have to look at LTVs, credit scores, their reserves.
I guess long story short, with the conversations we've had, we are cautiously confident that the MBA, the builder groups, the NAR will have input into this process and allow for a new QM definition to emerge over the next 18 months. We hope it's not something that gets pushed too long, but it is starting to create a lot of chatter. We spent two days on the Hill. I think it was about six, eight weeks ago, and this was our really exclusive topic.
Alex Rygiel (Analyst)
That's very helpful. Thank you very much.
Sheryl Palmer (Chairman and CEO)
Thank you.
Operator (participant)
Thank you. And our next question comes from the line of Alex Barron with Housing Research. Your line is now open.
Alex Barron (President and Founder)
Yeah. Thank you. I wanted to just ask about the comment you made, Dave, about benefit from purchase accounting and that impacting your margins. I thought it's the other way around that the margins get better as time goes by because there's less purchase accounting. Can you just clarify around that?
Dave Cone (EVP and CFO)
Yeah. No, we talked about that in the fourth quarter. This is a little bit unique situation. Typically, in an M&A, the acquisition is done above book. We bought this at one times book. So if you think about how you have to allocate fair value out, it's a little bit different in that you have to allocate some to goodwill, and it brings down the fair value of the land assets that you're acquiring. So what we're seeing in that is a little bit artificially low land value coming through, which obviously reduces the cost and increases the margin. In the fourth quarter, which is our first quarter with AV as a combined business, that benefit actually offset the AV drag just from the lower margins that they got historically just because their cost structure was a little bit higher.
And I mentioned every quarter what we were going to see is that drag was going to continue for about 18 months, but the benefit was going to step down every quarter. So this is now the third quarter of that benefit step down. We'll get a little bit more benefit next quarter, but then after that, that benefit's gone. And then at that point, we'll be close to working the AV margins to be something more in line with legacy Taylor Morrison.
Alex Barron (President and Founder)
Got it. Okay. And then I'm not sure if I heard anything on the delivery guidance. Seems to me, based on your orders in the last couple of quarters, I don't follow why the deliveries would be in the range you gave. Anything you guys were expecting why deliveries would step down versus what you just delivered this quarter?
Sheryl Palmer (Chairman and CEO)
Well, Alex, I mean, we overdelivered in the quarter to our expectations because of the inventory that we put on the ground and our ability to move through the inventory a little quicker. So some of that is a pull forward, but there's still a universe of inventory that we have in the ground and the production machine that you just don't pivot that overnight. So we're very confident with our overall numbers, and maybe there's a little bit of room, as you could tell with the increase in our guidance. But you can't look at a quarter and all of a sudden change the inventory that you have in the ground. Everything's already in the ground that will be delivered in 2019.
Dave Cone (EVP and CFO)
Yeah. I think it's important to recall to Sheryl's point that our guidance for the full year, we took the low end and the high end of our range for closings each up by 100. So this is more of a timing issue around the Q3, but we actually feel very good about the year.
Alex Barron (President and Founder)
Yeah. I do as well. Okay. Great. Congrats. Thanks.
Operator (participant)
Thank you. And that concludes today's question and answer session. So with that, I'll turn the call back over to Chairman and CEO Sheryl Palmer for closing remarks.
Sheryl Palmer (Chairman and CEO)
Thank you so much for joining us today. We truly appreciate the opportunity to share the quarter and our exciting new news about Christopher Todd with all of you, and we will talk to you soon. Have a great day.
Operator (participant)
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.