Good morning and welcome to the Taylor Morrison First Quarter 2018 Earnings Call. Currently all participants are in a listen-only mode. Later we’ll conduct and 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.

Thank you and welcome, everyone, to Taylor Morrison's first quarter 2018 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 will 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. And we do not undertake any obligation to update our forward-looking statements. Now let me turn the call over to Sheryl Palmer.

Thank you, Jason. We appreciate you joining us this morning as we present Taylor Morrison's results for the first quarter of 2018. Getting right to it, I'm delighted to share that we exceeded our expectations in several operating metrics, including sales, home closings gross margin, and earnings per share. Now, as we mentioned on last call, we started the year with an exceptionally strong sales pace of 2.5, and since then have only continued to see that accelerate. We closed the quarter with a sales pace of 2.8, our best pace since the first half of 2013, representing a 40% two-year growth rate. It's important to note that we recognize these strong paces across our portfolio, touching each market, consumer segment, and price point. For the quarter, sales were 2,443, with an average community count of 288. Achieving strong paces and growth in orders, even with fewer communities open than in the first quarter of 2017, points to our team's ability to deliver on our customers' expectations. Having the right product in the right locations with a trusted customer experience from beginning to end yielded our solid results. Our performance in the quarter drove $0.41 of EPS, a home closings gross margin of 18.8%, and an EBT margin of 7.9%, both improving 80 basis points over first quarter last year. I'm pleased to see this accretion in margin rate, which is due in part to mix and attributable to the strengthening of our operational efficiencies and cost savings practices. Our teams across the country continue to embrace ways of working smarter, not simply harder, to enrich both the lives of our team members and our customers. All in our quest to achieve operational excellence, one of our three strategic focus areas for the year. By way of example, we are…

Thanks, Sheryl, and hello, everyone. For the first quarter, net income was $47 million and earnings per share was $0.41. Total revenues were $752 million for the quarter, including homebuilding revenues of $733 million. Home closings gross margin inclusive of capitalized interest was 18.8%, representing an increase of 80 basis points when compared to last year. The year-over-year improvement is driven by product mix shifts across the organization, operational enhancements that are helping to offset cost increases, and lower capitalized interest. On a gross margin basis, we came in at 19%. Moving to our financial services, we generated more than $14 million in revenue for the quarter. Our mortgage company capture rate for the quarter came in at 75%. SG&A as a percentage of home closings revenue came in at 11.9%, about even with the first quarter of 2017. While our first quarter is typically our highest SG&A rate of the year, this has been compounded as we are seeing some of our closings shift to the back half of 2018. As we move through the year, the increased closings growth will drive SG&A leverage and we continue to believe we will achieve SG&A in the low 10% range, consistent with our guidance. Our earnings before income taxes were $59 million or 7.9% of revenue. Income taxes totaled about $12 million for the quarter, representing an effective rate of 19.8%. This is significantly lower than the first quarter of last year due to tax reform. In addition, our Q1 tax rate came in more favorable due to legislation passed this February which extended energy tax credits retroactively through the end of 2017. Those energy credits resulted in a one-time benefit of $3.8 million for the quarter. For the quarter, we spent roughly $202 million in land purchases and development. At…

Thanks, Dave. Before opening the call for questions, I will spend some time providing an update on several of our markets, beginning in the West. Our three California divisions are experiencing strong demand and have seen a healthy increase in traffic and sales paces compared to the first quarter of 2017. Resale inventory remains especially low within these markets and the lack of supply continues to support price appreciation in many of our communities. While the recent rise in interest rates has not impacted our demand across our price points, affordability continues to be a concern in California. Land remains very competitive within the state, but we continue to find ways to remain true to our strategy of pursuing core locations. In Southern California, for example, the affordability factor as well as a booming job market in the Inland Empire really supported our case to seek attractive deals within the Riverside and San Bernardino County submarkets. Our JVs in Southern California also experienced strong demand in the first quarter, particularly at our Sea Summit community, nestled along the coastline in San Clemente, where buyers are feeling some urgency due to the declining number of available home sites. In fact, we have seen a significant pickup in sales year over year in our coastal market communities. In Sacramento, we saw a 30% increase in sales pace compared to the first quarter of 2017. The demand is coming from both organic household formations in addition to Bay Area migration, which is at an all-time high. It's interesting to note that a significant portion of the migration is the 55-plus buyer group. More people are moving to the Sacramento region from the Bay Area than to Seattle, Denver, and Phoenix combined. That said, our Bay market still had an excellent quarter with truly…

[Operator Instructions] And our first question comes from the line of Ivy Zelman with Zelman & Associates.

Sheryl, there has been a lot of disruptors entering the market in terms of in the real estate services brokerage industry as well as in the mortgage industry. And just thinking about the new home market versus resale, there seems to be a widening of the premium that the consumer is willing to pay. First, if you can comment on that, if you are seeing that premium widen and if you think it's sustainable. And is it related to some of the new home amenities that might be more towards a smart home? Or anything that might really pull an incremental buyer in that's differentiated from prior periods of housing strength?

Yes, thanks, Ivy. Absolutely, you are right. We have seen that gap widen actually quarter over quarter over the last probably 24 months. I don't think we will continue to see it get wider, but I do think you will continue to see the gap. And I think you hit it right. For a long time, we talked about the impact of old versus new and energy and how you refurbish these houses. I think now you have to add technology to it, even though everything has gone wireless, the ability to take some of these older homes and really get them to today's technology standards is very, very difficult. And when you think about what the consumer really wants across all price points, you are right it absolutely is on the smart home.

Could you elaborate what you are doing specifically, if anything, to provide the consumer a smart home?

Yes. So it's a little bit different across the markets. We are looking at some programs that I'm not prepared to announce yet across the portfolio. We are testing, piloting, I would tell you, in some markets right now and then we will go a little broader. But it's everything around just disrupting the overall customer experience really from start to finish. And that would be everything from first contact in our Internet communications all the way to the customer journey once folks come in our front door and how we take them through the construction process and how they are living in their house with new technology. I'll comment on specifics as we get a little further along.

Great. Can I sneak in one more, please? There has been a lot of questions on prior calls related to potential automation in the construction process. And there's obviously Katerra is big in the market in terms of a new disruptor. Are you right now ready to talk about anything that you are working on? Or any expectation that you will increase backward integration and providing more ways to improve overall cycle times with automation?

Yes, good question. We challenge business every day, continue to explore more efficient options. Lots of work is being done on it. A few of us in the Company have been very involved in our past lives on prefabbed walls, steel construction, really the manufactured efficiencies that you would expect. We are doing it today in some markets selectively. But because of our experience, we know the good and we also know the pitfalls. I would tell you that I think it's an industry we will continue to explore: sustainable, cost-efficient solutions I think that have been discussed on many of the calls. As I said, there's a lot of smart people spending a great deal of time on it to gain efficiency. But it really is complicated as you break apart the pieces. If you think about it, what we are really trying to solve for is the labor arbitrage between plant operations and field operations, as the material costs don't change as long as you really do get waste out of the system, which a controlled environment certainly helps with. The other great opportunity is cycle time improvement, and the other headwind offsetting that is the cost of transportation. I would tell you today, our success has been on the QA side: scheduling, product efficiency, truly planned production, partnering with our suppliers' trades, efficiency in the field one trade at a time to get days out of the schedule. Over time, I would expect that technology will play a greater role but I think we are a little ways apart still.

Very helpful. Good luck, Sheryl. Thank you.

And our next question will from the line of Michael Rehaut of JP Morgan. Your line is now open.

Thanks. Good morning, everyone. First question I had was on the sales pace. And you mentioned that came off to a great start for the year, record for the first quarter and in April. I was curious if you could kind of help with breaking that down between entry-level and move-up. And what areas, if you are seeing greater year-over-year differences between one segment and the other? As well as if you could provide any color in terms of any regional standouts?

Yes. You know, the nice thing here, Michael, is, like I said in my prepared comments, one of the things that has us feeling so good and bullish is it really is across the portfolio. When I look at the results, literally division by division, the majority of our divisions are up year over year from a sales pace standpoint. We have a couple of that are flat. And generally the one or two that are down -- I mean, I can look even to the numbers and say it's because of the timing of new openings. And that would be across our first-time business, our urban business, our active adult business, and our first and second move-up, and across all markets. So it's rare that we see kind of everything rowing in the same direction, but actually it's really across the business.

That's very helpful. And certainly, the comment around strength around different parts of the customer segment mix is a little different. I mean, certainly, most builders are saying move-up is fine, but overall pointing to a much higher degree of strength in the entry-level. So that's encouraging.

Yes. And I would tell you that is just not the case with us. We are absolutely seeing it in the first-time, second-time move-up and the active adult, which tends to be at a much higher price point.

Yes, it's definitely observed and a positive for your business. I guess secondly, just shifting to the margins for a moment, it came in a touch above our estimates. Maybe there was some shift in timing issues, as you guided the second quarter closer to 18% and you reiterated the full year. But I was curious as you look at the full year if you could just kind of remind us how you are thinking about some of the cost inflation elements of the equation. And obviously, you are getting pricing to more than offset that, but I was just curious if you kind of break down materials and labor as well as perhaps lot costs where you are seeing the biggest areas of inflation, and if there is positive mix or just pure price that's more than offsetting that?

Sure, Michael. Good morning. I will maybe start on the cost side, and I think it's going to be consistent with what you are hearing. From a direct billed cost standpoint, we're probably seeing that we are up maybe a little bit more than 1%. Lumber continues to move around..

That's year over year? That's year over year, Dave?

Right. So lumber continues to move around. As you know, we have price locks in place. OSB has been a little bit volatile as well. Other places where we continue to see increases are around concrete and steel. Obviously with the tariffs, that's had some impact. So we are seeing some increases in block and retaining walls, brick and tile roofing. But overall, steel makes up a relatively small component of the overall costs. But you also touched on it. I mean, labor continues to be the challenge in many of our markets as we see those high-volume market. But through a lot of the work we have done around construction efficiency initiatives, strategic procurement, and value engineering some should cost work, we have been able to offset a fair amount of those cost increases. From a margin perspective for the year, as we look out, we continue to expect benefits from strategic procurement and construction efficiencies. We are going to benefit from lower capitalized interest, and we do continue to believe pricing will stay ahead of cost. We saw price increases in about 50% off our communities. But we will continue to battle through the pressure. We will see higher land costs roll through, as they have every quarter for the last couple years. So that always puts a little pressure. And we will see continued cost pressure from the hurricanes. That is going to linger for a little bit longer. So when it comes down to it, I think we are going to continue to see these pressures, both on the labor side, especially as we move towards the end of the year, and then the commodity side as well. But we do believe that based on where we see our backlog going, what we have been able to do with pricing, that we are going to have to continue to -- that we will continue to see year-over-year accretion on our margin. Probably the one callout, though, is the second quarter, we are going to see a sequential decline from the first quarter. And that is largely due to mix issues. And then we will see that tick back up in the third and fourth quarter.

And to Dave's point on the pricing power, we saw improvement and the ability to raise prices in more than 60% of our communities in…

50%.

50% in the last quarter. So as Dave said, that gives us some great confidence that we will be able to continue to stay ahead of these pressures.

Thank you. And our next question will come from the line of Stephen East with Wells Fargo. Your line is now open.

Maybe on the closings a bit, it came in less than we were expecting, but you have talked a lot about labor issues. Maybe you could elaborate on what you're seeing there, where you are seeing it. The West, I'm assuming you are seeing some there because that was one of the lower backlog conversions you have had this cycle. So just trying to understand what is going on from a closing perspective and how much of it is driven by labor.

Yes, a couple different things there, Stephen. As I said in the comments, when you think about the slight shortfall we had in the quarter, it really did come down to starts that we didn't get in the ground much more than it did around labor. As you know, we exceeded our expectations in Q4. And everything that we had under production in Q4 in the hurricane-affected markets, we were actually surprised to the upside on how everyone rallied and got them to the finish line. But we had a lot of development activity going on at the same time. And so when we lost some days and weeks in both Texas and in Houston and parts of Florida, we really expected the teams to be able to pull that back in, in the quarter when those starts got delayed a few weeks. But quite honestly, as time went on and you started losing some of the trades, let's say, in Houston to a place in the cycle, in the construction cycle, where everyone is now finished on or moving toward the finish trade part of the cycle, we just couldn't quite pull -- a week would have made all the difference in the world and we just weren't willing to compromise our closing processes to do that. So the labor impact was specifically in our Texas and Florida markets.

And then on the West…

Yes, on the West, Stephen, I guess a couple things. One, I would say our Q1 conversion was probably more in line with what we saw kind of middle quarters last year. A lot of it was driven by Phoenix and California, mainly the Bay Area. If you look, we are a little bit lower in Phoenix year over year, but we are actually above where it was two years ago. So some of that is to Sheryl's point around development and some timing. From a Bay Area perspective, some of that is centered around timing of buildings -- when they are closed, we get the COEs on those. And I think what you're going to see is probably something on the lower side for conversion in the second quarter, but then it is going to tick up pretty significantly in the third and fourth quarter. Whereas in the Central, you are going to see that grow as we move through the year, and you will also see that on our East region as well.

And then a couple questions on the land buying. One of your competitors stated that they were seeing less competition in the move-up segment of land acq as a lot of the builders have pivoted toward entry-level. One, I wanted to get your thoughts on whether you think that is actually happening in your markets. And then two, in our meeting, you all discussed tweaking your land buying process a bit to avoid the big misses, if you will. Maybe you could elaborate on what you all are doing there. And is that something that we would start seeing -- if you are looking at land today, we wouldn't really start seeing until 2020 or so?

Yes. I just want to make sure I understand what you are implying by big misses so I answer the right question. On the first question, Stephen, you are exactly right. And we have been talking about this for probably close to a year, that the unintended benefit of this kind of flight to the fringe and affordability from other builders has made what's a very difficult tight market actually a little better in certain submarkets, where we are not seeing the level of competition in the core on that first-time move-up. So we are going to continue to stay true to our knitting and believe it's been helpful. So I would agree with what I heard from a couple competitors as well. Can you give me a little more color on the big misses?

Yes, sure. You were talking about -- you all probably do a better job than anybody we see out in the field as far as targeting the consumer, the right consumer for your product. But when we were talking, you've said when you do miss, it gets pretty painful in your gross margin hit, etcetera. So you've started to evolve that process. I was just wanting to know maybe what you are doing there. And when do we start to see those misses get mitigated. Is that more a 2020 event or would we see that in 2019?

I understand what you're -- I recall the conversation. Sorry about that. So specifically, you know we spend a lot of time on consumer targeting. And sometimes we tend to act a little contrarian to others. And I think this affordability thing is a very good example, where if I were to go back through the last cycle, we were probably the first to really jump into that first-time move-up, second-time move-up buyer because we knew kind of the big-box syndrome wasn't going to be here forever. Just like now, even though a piece of our business is that affordability factor, we are going to get there a little bit different way. What we found through the analysis we do on our underwriting is that if we completely target and completely nail our underwriting on the first- and second-time intended consumer group that our margin is probably somewhere close to 300 basis points, 400 basis points higher than if we end up getting that a little wrong and it ends up being the third or fourth tier of consumer that we've targeted with our product selection. We are seeing that benefit every day as we are opening up new communities. But you are absolutely right. You will really start seeing that come through the land in 2019 and 2020.

Yes, to that point I would say when we look at our guidance for 2018, we had a bit of a bullish view when putting that out there. And that is still is in place, given we feel we are going to be accretive year over year. And that is on top of being accretive 40 basis points in 2017 over 2016. So as we look forward, I think what you are going to see is this come in a little bit each year. It is not going to come in necessarily in all one year, because this has been more or less an evolution of a process. And I think at the end of the day, though, it is also going to help us to continue to fight off some of these rising costs.

Yes, very much so.

Got you. Okay. All right, thank you.

Thank you. And our next question will come from the line of Nishu Sood with Deutsche Bank. Your line is now open.

Thank you. I wanted to start on the Darling. That I think has been a part of your folks' operations now for about five years. The combination in Houston, and especially as Steve was mentioning, you folks have a pretty thoughtful approach to targeting customers. So why combine the operations now? Why only in Houston? So maybe if you could explore that a little bit more, please.

Yes. So actually, the two operations are set up pretty similar between Dallas and Houston. Recognizing the differences -- when we were in Dallas, we only were in Dallas with the Darling business up until last year. And then we added the TM brand and started closing houses I think in the fourth quarter of 2017. But that is under one division president with some folks on the team focused on both brands. Very similar to what we have now in Houston. And I would tell you this has been a journey. We have obviously over the last 12 -- call it 12 months been garnering some efficiencies in the back office. So we've done things like purchasing account -- purchasing has got a little bit of a combined team, but we also have two dedicated resources. Finance has been a consolidated team for a while now. The primary reason to do it was really we are going to stay focused and there are dedicated resources on both teams. But when we look at land acquisition, we look at the people side and being able to really respond to market needs and working with the developers. And not actually competing for land within one marketplace. Having one thoughtful leader looking at the overall business opportunity makes more sense and where we can maximize land assets with putting both brands in. So it's actually just the completion of some work that's been going on for some time. And in no way should it be considered any change to our expectations around the Darling business and holding that brand at a very different standard. The value -- the attributes of both brands are quite different and we will continue to protect that.

I think it's as much of internally, we recognize this consolidation versus externally I think people are going to see the two distinct brands, they are staying. But at the most basic level, this included us simply putting both brands in the same office. So they are in the same location. And that's helping us to garner some efficiencies. As you can imagine, it's a little bit easier to walk down the hall than if you have to drive down the street. So that is just another added benefit for us.

Got it. And the second question I wanted to ask was Sheryl, you laid out an interesting thesis about the unusual seasonality of demand in 4Q,that it didn't slow down between October and December. And so strength carried into January. Obviously, optimists pointed to strong underlying housing fundamentals and skeptics are more thinking about pull-forward of a demand because of rising rates. How has that played out now as you've gone through 1Q? And any further insights there on what drove that and how that might play out the rest of the year?

Yes, it was nice to see the acceleration. When I compare Q1 2018 to Q1 2017, we saw just over 25% acceleration from the first month in the quarter to the last. So it felt pretty good, and then seeing that continue in April as we announced was also very positive. We get the question, and there has been a lot of -- I've heard a lot of discussion on the calls around is this a pull-forward. And as I shared on the call, we've done a fair amount of research since the first of the year really understanding if that is the case. And I would say consumer confidence is more important to the business than any of this chatter on interest rates. When we are talking about -- I mean, in the big picture still modest, but over the last quarter, I recognize significant compared to what we have seen in the last few years. Further in the data, as we really dissected it, we were able to look at generally the view, as I said, of about 90% of these shoppers that were surveyed. This really isn't going to impact their home buying decision. And when you dissect it by consumer group, it does get a little bit more interesting, where when you look at that move-up buyer and the boomers and the silent generation, they are absolutely not impacted or even moved by any change in interest rates. You do get a little bit more sensitivity at that most affordable price point. And even the millennials, the way they are looking at it, because they are not as likely to pay cash, they are probably more likely to scale down than change their desire, which is generally motivated by a life change. And then there's some other things that excite me about it as I look around, some of what we are seeing and some of the opportunities ahead. For example, just announced last week was this new 97%/3% Freddie Mac program I think is pretty exciting. It's called Home Now and it's really the first impactful program we've seen in quite some time, I'd say since the FHA lower limit. We've seen a lot of programs in the past, but they've also come with a lot of restrictions. But this is going to be a great alternative to FHA borrowers that are limited with low loan limits. The new Freddie program is at conforming limits of 453,000 and it is a 3% down 30 year financing program with no geographical or income limitations. It is only first-time buyers and it's going to be available in July. So I think there is more and more opportunity that will continue the momentum for us.

And our next question will come the line of Matthew Bouley with Barclays. Your line is now open.

I guess first, I just wanted to follow up on the gross margin guidance questions from earlier. I think, Dave, you highlighted some mix issues as a near-term impact here in the second quarter. I guess just how long do you expect that issue to persist? And I guess just trying to hone in on your visibility around the re-acceleration in gross margins in the second half. Thank you.

It's a great question. I would say mix is always there. If you were to maybe step back and look at margin year over year, we expect to drive accretion. But we will see some movement quarter to quarter based on mix. So depending on the amount that maybe some of our new businesses that have come on, they are generally still at a slightly lower margin rate, if we over penetrate in that area, then that brings down the mix, which we will see in Q2. Another example would be around the West in times if they over penetrate brings down the rate, obviously does wonders for the gross margin dollars. But to answer your question directly and to be clear, we are going to see mix impact us and see some sequential decline in Q2. And then we will see that again grow in Q3 and Q4. And that will get us to our stated guidance about the mid- to high-18% being accretive year over year.

Second question, I wanted to ask about your comments around spec. Because it looked like your overall spec count climbed 17% or so, but of course finished spec was down year over year. Is that just a reflection of kind of extended build cycle, labor-related? Or has there been any kind of shift in your spec strategy here, perhaps in a rising rate environment? Just your overall thoughts on that.

Sure, yes, absolutely. We are big proponents of specs, especially when we can sell them before they are completed or just after they are completed. The margins are generally in line with our to-be-built margins and sometimes even higher. So the tick-up that you really saw was specs in process. A large part, like we did last year, is just trying to get a jump on the year, trying to get as many in the ground as we can. What we really focus on is managing the completed specs. We try to have, call it, one, just under one per community. And we've been able to be under that now for some time. And as I said in the prepared remarks, we wouldn't mind having a few extra completed specs because we have some strength in many of our markets, as you can see through the pace that we delivered in Q1 as well as April.

You know, and it's also interesting, because there has been a lot of questions around are people moving forward and wanting to get into houses quicker because of the potential of rising interest rates. And when we look at the analysis in our business, we are actually finding a significant amount of -- and that was when we look at Q1, we also thought we could have sold more specs to cover some of the hurricane start delays. But actually, when we look at our to-be-built business as a percentage of our total business, it's not moving down at all. If anything, I would tell you in some markets, it's actually moving up, further supporting that people aren't overwhelmed by some of this rate movement.

Thank you. And our next question will come from the line of Jack Micenko with SIG. Your line is now open.

I might have missed it. Did you give the actual unit number of what you thought might have gotten pushed out? And then is it safe to assume that number, if you give it to us, is all going to come into 2Q?

No, we didn't give any specifics because it's hard to identify exactly which of those units. But I would tell you that if you look at our general view on where we try to give our guidance, you can tell we fell a few units short. And yes, you are going to have some of that obviously push into Q2. And then you've got some offsets to Q2, like for example what we told you about Dallas.

Yes, and maybe just more simplistic math, Jack. I think if you look at our closings for the quarter and just divide by 13 weeks, you could see we are about a week off. And we will probably continue to see that in the second quarter. But as Sheryl mentioned, it's going to be -- the deliveries are coming in the second half. The starts are in the ground.

The starts are in the ground.

The starts are in the ground. And so that is why we feel good about the full year.

And then you've talked for some time, I guess, about the operational improvements. And you pointed to that as part of the reason the margin came in better this quarter. From the outside looking in, can you help us understand -- I guess when I listen to you speak, it sounds like there are construction value engineering operational initiatives. There are sort of back-office consolidation cost initiatives, and then there is what seems to be salesforce CRM-type digital marketing initiatives. Is that the right way to think about the three main areas? And then could you maybe give us a sense, because it relates to margin, what inning maybe we are in and where you are in each of those?

I would tell you I don't think the game -- I'd start with I don't think the game ever ends, Jack. That we continue to -- our second story will become our third story because we will continue to seek to improve everything about the business and look under every rock. But I think your buckets are exactly right. I gave the salesforce analysis on the phone -- I mean, in my prepared comments and how we are, by the end of May, we will be 100% rolled out within the Company. We are already starting to see the benefits. And I really can't begin to quantify what that looks like on the sales floor when we give our sales agents back time. Obviously, we've talked a lot about over the last couple quarters, one, the cost efficiency, our purchasing effort, our scheduling efforts. The way we are working with our trades, the way we are value engineering our plans. I mean, it every single part of the business that we laid out about 18 months ago, two years ago. And those initiatives are well to the finish line, and there's another whole group of initiatives right behind them.

I guess to summarize, it would be safe to assume then that there should be a potential margin benefit from these things after everything else that happens in labor and land and everything else? But operationally, some tailwind to margin into 2019 and 2020 and that sort of thing?

Yes, absolutely. And you would expect you get a lot more than holding ground, that you actually get the benefit coming through. But what we can't predict right now is what happens to land prices to offset that cost, commodities, all the things that Dave spoke about in his comments.

I think we are very focused at driving accretion at the EBT line. And that's going to vary. It's going to come sometimes through margin, sometimes through cost, hopefully through both. But that kind of just rolls into our overall philosophy. It starts with our capital allocation strategy, driving to the best use of cash, efficient inventory management, driving pace, driving inventory turns -- asset turns. That should all lead to improved EBT and ROE accretion year over year.

Our next question today comes from the line of Jay McCanless with Wedbush.

The first one I had -- I know you all discussed in the prepared comments about the 55-plus and the empty nester buyer. Can you talk about what's happening in your active adult communities, how sales pace is going there? And then also, maybe in your non-targeted communities, what type of empty nester demand growth you are seeing?

Jay, when we look across the portfolio, there is actually only a handful of those communities that are actually deed-restricted. The majority, if I think about our Florida communities, probably 80%-plus of those are targeted, not restricted. But they certainly live as 50-plus communities when I look across the portfolio, about a third of our buyers fall into that category. A high percentage of those fall into these lifestyle communities and some of them coexist within our family communities. You know that we are, and have been very, very bullish on this age group for quite some time. I mean, they have got the strongest balance sheets of any age cohort. They have the greatest likeliness to buy over the next 10 years of any consumer group. We have had success in all of our communities across the portfolio, our lifestyle communities. And it's really around differentiating that service lifestyle opportunity for these consumers. I mean, the plans -- it's in our plans, it's in our amenity packages. I had the opportunity last week, because we were recognized for our community service and some filming was being done in Esplanade, and meeting with a number of homeowners who were gracious enough to be interviewed on this programming. And it's hard to express the way they look at this journey, but they are so excited to be able to have this lifestyle experience and be amongst friends and folks just like them that it just feeds on itself. So when I look at the traffic and I look at the sales, I look at how we started specifically in Florida on the season against very, very tough comps, we did well across the entire portfolio of active adult.

That's good to hear. The second question, playing a bit of devil's advocate here, we have been doing a lot of work on that Freddie Mac program you highlighted earlier. And we'd also point out the fact that Treasury Secretary Mnuchin said there is not going to be a push for GSE reform this year. Why not take the more active stance and a more aggressive stance in expanding your entry-level price point offerings? It seems like the government wants more of those homes. They are willing to give what we think are some pretty aggressive terms on these new mortgage programs to make that happen. Is there a potential for you guys maybe to either acquire that talent or that land? Or are you developing some initiatives on your own to target more entry-level price points?

So, I agree with you completely, Jay, on GSE reform. Based on all the work we have done on the Hill, I don't expect we are going to see that this year, maybe even in this election cycle, to be honest. It's a very complicated topic. If you look at 2017, the affordable first-time buyer was about a third of our sales. Obviously, it's very market-specific and we have larger penetrations in parts of the portfolio. But I think we have articulated the strategy fairly consistently around the importance of projecting the business and the balance sheet long term with core locations. Certainly where it makes sense and the land is available that yields affordable housing, we are all over it. You know, we can sit here and debate what an A location is or a C location, but we all know that the path of growth in truly emerging submarkets are critical and not markets that screech to a halt when the markets show any sign of weakness. So simply speaking, I think when I look at the overall business, about a third of the portfolio feels right. And we can do that without putting the business at risk and without going out to the fringe markets and the peripheral. Not that we are not there, because like I said, it is about a third of our overall business today.

I am showing no further questions in the queue at this time. So it is my pleasure to hand the conference back over to Ms. Sheryl Palmer, Chairman and Chief Executive Officer, for some closing comments or remarks. Ma'am?

Thank you. And really appreciate everyone's time today and look forward to speaking to you to share our Q2 results. Have a great week.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude the program and we may all disconnect. Everybody have a wonderful day.