Taylor Morrison Home Corporation

Good morning and welcome to Taylor Morrison's second quarter 2023 earnings conference call. Currently, all participants are in a listen-only mode. Later, we will 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 Mackenzie Aron, Vice President of Investor Relations.

Thank you and good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question and answer session, will include forward-looking statements that are subject to the Safe Harbor Statement for forward-looking information that you can review in our earnings release on the investor relations portion of our website at taylormorrison.com. 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 SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now, I will turn the call over to our Chairman and Chief Executive Officer, Cheryl Palmer.

CHERYL PALMER Thank you, Mackenzie, and good morning, everyone. Joining me is Kurt Van Hefty, our Chief Financial Officer, and Eric Heuser, our Chief Corporate Operations Officer. As you may have seen in this morning's earnings release, our Board of Directors has appointed Kurt as our EVP and Chief Financial Officer. Kurt has been serving as our interim CFO since May and has been with the company since 2020 when he joined by way of the William Lyon acquisition. He has held numerous home building field and finance leadership roles throughout his nearly 30-year career, and I couldn't be more pleased to have him in the role. Now diving into our call, as usual, I will begin with our quarterly highlights, an update on the market, and our strategic priorities. After my remarks, Eric will discuss our strong land portfolio and investment strategy, while Kurt will review our financial results and guidance metrics. Our second quarter results once again outperformed our expectations across all key metrics as we continue to realize the benefits of our scale, streamlined operations, and balanced portfolio along with improved market conditions. Among the highlights, we delivered 3,125 homes at a home closings gross margin of 24.2% and an SG&A ratio of 9.2%. resulting in diluted earnings per share of $2.12. Coupled with nearly $400 million in share repurchases over the last 18 months, this performance drove a 30% year-over-year increase in our book value per share to almost $46 and a return on equity of 22%. Our focus on the operational efficiencies that generated these earnings has been equally matched by our balance sheet stewardship. As a result, we have never been in a stronger position to support future growth as we ended the quarter with an all-time high liquidity position of $2.3 billion and a home building net debt to capital ratio of just 15.4%, which was down 2,100 basis points from a year ago. On the demand front, sales and shopper activity remained healthy throughout the quarter, Maintaining the momentum that began in the early spring selling season. In total, our net sales orders increased 6% sequentially and 18% year over year, driven by a monthly absorption pace of 3.1 per community as compared to 2.9 in the first quarter and 2.6 a year ago. It's worth noting that one of the many ways in which we are driving a more efficient, faster turning business is by targeting an annualized absorption rate in the low three range as compared to our historical low to mid twos. This increase reflects the intentional shift in our community mix and geographic footprint in recent years. At the same time, we have increased the average size of our newly underwritten communities by approximately 50% over the same period which will also improve our sales velocity and cost leverage as we drive enhanced long-term returns on our invested capital. When I look across our portfolio, sales momentum was evident once again across nearly all our markets. Strength was most pronounced in our west region, led by Sacramento, Seattle, and Phoenix. Our central region also improved meaningfully, most notably in Dallas and Houston, which was encouraging given its slower start to the year. And lastly, in the east, nearly all our markets continue to see healthy trends, with Raleigh and Charlotte standing out most positively. By consumer group, our second quarter net sales orders were comprised of our move-up category at 39%, our entry-level segment at 33%, and our resort lifestyle communities at 28%. Compared to a year ago, our entry level and resort lifestyle sales have recovered strongly, while our core move up segment has remained the most stable in recent quarters at healthy paces. Alongside the improvement in demand, we raised pricing or reduced incentives sequentially in the majority of our communities during the second quarter. These pricing adjustments have generally been modest as we continue to balance affordability with pricing power on a community-by-community basis. Most importantly, this renewed stability has reinforced shoppers' sense of urgency and further solidified the value of our backlog, which is also secured by average deposits of $62,000, or just over 9% per home, while also partially offsetting any cost pressures. Thus far in July, activity has been consistent with seasonal norms while leading indicators, including web and foot traffic, mortgage pre-qualifications, and digital home reservations are stable at healthy levels. On the latter, it's worth sharing that our online home reservation systems contributed 16% of our second quarter growth sales with an all-time outsized conversion rate of 47%. Since the Federal Reserve began its aggressive fight against inflation a little over one year ago, an equilibrium has emerged where consumers have reset their expectations and our industry has recalibrated its pricing, incentives, and product offerings to align with today's higher interest rate environment. At the same time, consumers have been met with a historic lack of for sale inventory in the existing home market where approximately two-thirds of homeowners hold interest rates below 4%. This has driven meaningful share gains for new construction, with the percentage of new home listings more than doubling from long-term norms to over 30% of the market. Further compounding these dynamics, our research indicates that homebuyers are increasingly preferring new construction to existing homes for ease of living customization, or cultural preferences. While affordability remains top of mind and a true challenge for some consumers, especially those in the most entry-level price points who require more support to achieve manageable monthly payments, the lack of inventory coupled with underlying demographic strength have supported resilient demand for new homes. At Taylor Morrison, we are well-positioned to continue to serve that need across our balanced portfolio of entry-level, move-ups, and resort lifestyle communities. In each of those segments, we primarily invest in well-located prime core sub-markets where performance has proven to be the most durable throughout housing cycles, as has been the case over the last 18 months as pricing pressures were felt most acutely in non-core areas where we have little exposure. In addition, this strategy allows us to attract a relatively well-qualified consumer, even among our first-time homebuyers, who are generally better equipped to carry higher housing costs if needed. For example, of our buyers financed by Taylor Morrison Home Funding in the second quarter, 41% were first-time buyers, and by age group, 51% were millennials, and another 4% were Gen Z. Across all of these borrowers, credit metrics were excellent, with an average credit score of 753, an average down payment of 24%, and an average household income above $180,000. Also underscoring the strength of our typical buyer, the average square footage of those choosing a to-be-built home has increased year-to-date despite the interest rate environment. As you have heard me emphasize on prior earnings calls, we are committed to leveraging the power of finance as a sales tool to overcome interest rate volatility and offer various personalized incentive solutions. Driving an all-time high mortgage capture rate of 86%, this finance-first strategy reinforces the compelling value and confidence we can offer our customers while also minimizing the gross margin headwind we would otherwise experience from outsized pricing adjustments, as evidenced by the strength of our second quarter home closings gross margin of 24.2%. On the construction side of the business, we remain focused on driving faster inventory turns, tighter production schedules, and lower costs through simplification and streamlining. While we have made substantial progress in reducing the breadth of our option offerings and floor plans to drive critical efficiencies for our trade partners and builders without sacrificing consumer appeal, the opportunity is ongoing. Critical to those efforts, our Canvas option packages have achieved strong utilization rates across all price points as buyers are responding to the value ease and design aesthetics of our well-curated offerings. In addition to the time savings and operational ease of these nationally managed packages, our Canvas year-to-date option margins have exceeded those in our design studios. Driven in part by these initiatives, improving cycle times, including approximately two weeks sequentially in the second quarter and more expected going forward, will allow us to reduce the amount of work in progress inventory on our balance sheet, improve our inventory turns, and increase our overall production potential. Before I wrap up, while this week's Federal Reserve actions have once again reinforced the need for a highly dynamic approach to managing our business as we navigate continued interest rate volatility and macroeconomic uncertainty, we are well equipped to continue to do so. The tools we have put in place over the last year and the exceptional cohesion between our home building and financial services team will allow us to remain strongly focused on operating efficiently, investing for future growth, and serving our customers well. We have gained critical advantages by achieving greater scale, simplifying our operations, and embracing innovations to drive both growth opportunity and enhanced bottom line results And we will continue to leverage those strengths as we move forward. Now let me turn the call to Eric to share more on our land strategy.

Thanks Cheryl and good morning. In the second quarter we accelerated our pace of home building land acquisition and development investments sequentially to $397 million, of which 54% was development related. Our land investment approach is focused on achieving capital efficient, accretive growth in markets that are well positioned to benefit from long-term demand drivers and meet the needs and preferences of our well-balanced consumer sets. As we have discussed in prior earnings calls, we moderated our land spend as housing market conditions slowed over the last year. doubling down on what was already an opportunistic stance afforded by well-timed M&A transactions that meaningfully bolstered our pipeline of owned and controlled lots. This prudent approach allowed us to manage our portfolio risk, preserve strong cash generation, and position ourselves for potential growth opportunities, a longstanding playbook that we have successfully employed throughout our company's history. As we evaluate the market today, we are encouraged by the resilient demand trends driving renewed pricing stability, as Cheryl described, while land values have been relatively stable. While we will maintain our highly scrutinizing lens, we are beginning to see increased opportunities to deploy our strong capital base into accretive deals. At this time, we now expect our total land spend this year to be approximately $1.8 billion, still favoring development of existing assets. with anticipated further growth in 2024 as today's deal flow converts into closings in the months ahead. At quarter end, we owned and controlled just over 72,000 home building lots. This represented 5.8 years of total supply. With 43% of these lots controlled via options and other off-balance sheet structures, our supply of owned lots was just 3.3 years. Each of these metrics remain within our targeted ranges and our future mix will be based on a determination of the optimal financing vehicle for each land deal to maximize expected returns. It's also worth sharing that approximately 52% of our own lot supply was negotiated in 2020 or earlier, providing an attractive historic cost basis. Let me also offer a brief update on our growing built-to-rent business, Yardley. As of the second quarter, we owned or controlled approximately 7,200 lots across approximately 30 projects, of which about half are already under some phase of development. These amenitized horizontal apartment communities meet a unique void in the rental market and remain highly differentiated compared to other builder rent concepts. We expect growth in 2024 and beyond as projects underway today reach stabilized leasing levels. With that, I will turn the call to Kurt.

Thanks, Eric, and good morning, everyone. I'm excited for the opportunity and grateful for the support of our talented finance teams over the last three months in the interim role. This time has reinforced my excitement about the potential we have as a company to continue to grow and drive meaningful results. I look forward to working closely with our teams and also meeting many of you in the months ahead. Diving into the details of our second quarter, we generated earnings of $235 million or $2.12 per diluted share. Total revenue was approximately $2.1 billion, including nearly 2 billion from our home building operations. The latter was driven by 3,125 home closings at an average closing price of $639,000. Compared to our prior guidance, our closing volume benefited from a number of factors, including more spec homes sold and closed during the quarter, stronger closing conversions, and improvement in cycle times. While cycle times remain longer than historical norms, due primarily to the back end of the construction schedule, we did see sequential improvement of about two weeks for our second quarter closings. As older backlog homes complete, we expect average cycle times to continue to normalize, Given encouraging trends on this year's new starts, we expect at least another two week improvement by year end and further declines into 2024. During the quarter, we successfully accelerated our start volume by 36% sequentially and 6% year over year to approximately 3,500 homes. This equaled 3.6 starts per community per month, up from 2.6 in the prior quarter and 3.4 a year ago. As a result, at quarter end, we had 8,000 homes under production, including approximately 2,600 specs, of which less than 150 were finished, remaining well below our target of one finished spec home per community. Based on these units under production and the various dynamics impacting cycle times, We now expect to deliver approximately 11,000 homes for the full year as compared to our prior guidance range of 10,000 to 11,000 homes. This includes approximately 2,600 homes in the third quarter with a sequential decline reflecting the impact of last year's lower starts volume and weather-related delays earlier this year. As we look into 2024, we expect this year's higher starts activity in normalization and construction timelines to drive a meaningful reacceleration and growth. We continue to expect the average closing price of these deliveries to be around $625,000 for the full year, including approximately $615,000 in the third quarter, reflecting a higher share of spec home closings in the back half of the year. During the quarter, our home closings gross margin was 24.2%. While this was down from the near record level of 26.6% a year ago, it was still among the highest levels in our company's history. We believe this performance highlights the structural enhancements in our home building operations since achieving greater scale and strategic efficiencies in recent years, as well as the benefit of our balanced mix of to-be-built and spec homes. Looking ahead, we now anticipate our home closings gross margin to be around 23.5% for the full year as compared to approximately 23% previously. This includes approximately 23% in the third quarter. Consistent with our anticipated decline in average closing prices, this gross margin outlook reflects a greater second half share of spec home closings which have returned to a normalized lower margin profile compared to 2B built homes. This margin performance captures the benefit of our finance-first incentive strategy, as the cost of such incentives has moderated in recent months and our pricing has stabilized, as Cheryl described. With an all-time high mortgage capture rate of 86%, our financial services team produced revenue of $42 million, as compared to $35 million a year ago, at a gross margin of 39.5%. SG&A, as a percentage of home closings revenue, was 9.2%. While this was up 40 basis points from 8.8% a year ago, as we have adjusted to market conditions, it remained among the lowest, most efficient levels in our history. For the year, we are forecasting an SG&A ratio in the high 9% range. Shifting to sales, our net orders in the quarter increased 18% year over year, to 3,023 homes, driven by a 17% improvement in the monthly absorption base to 3.1 per community and a 1% increase in our ending community count to 327 outlets. Our cancellation rate was consistent with historical norms at 11.2% of gross orders. As we look ahead, we continue to expect our ending outlets to remain flattish between 320 to 325 for both the third quarter and full year. To wrap up, we generated $260 million of cash flow from operations during the quarter and ended with a record total liquidity position of approximately $2.3 billion. This included $1.2 billion of unrestricted cash and $1.1 billion of available capacity on our revolving credit facilities, which remain undrawn outside of normal course letters of credit our home building net debt capitalization ratio declined to another all-time low of 15.4 percent as compared to 36.4 percent a year ago we have a 350 million dollar debt maturity upcoming in march 2024 which we have ample cash on hand to address after which our next maturity will be in 2027. during the quarter We are pleased to have received an upgraded credit rating from Moody's to BA II from BA III with a stable outlook in recognition of our strong liquidity profile and proactive approach to debt reduction. Going forward, we expect to maintain our discipline and opportunistic capital allocation framework as we evaluate growth opportunities, debt management, and share repurchases. Now, I will turn the call back over to Cheryl.

Thank you, Kurt. We recently published our fifth annual environmental, social, and governance report, which showcases our organization's dedication to ESG progress. In this year's report, I am proud to share that we have made several key advancements, including the introduction of our inaugural greenhouse gas emissions inventory, covering our scope one, two, and three emissions, as well as our first ever climate risk management analysis in line with the Task Force on Climate-Related Financial Disclosures. By establishing these baselines, we will be better able to refine our long-term environmental strategy, which emphasizes the energy efficiency and livability of the homes we deliver to our customers and the biodiversity and stewardship of the land we develop across the country. We also doubled down on our commitment to diversity and inclusion with expanded disclosures for our workforce's racial and ethnic composition, demonstrating our commitment to transparency and accountability as we aim for meaningful change to ensure we are best able to serve our evolving customer base. Because of these longstanding commitments to integrating ESG principles across all aspects of our business, we are proud to have been recently named as one of America's most responsible companies by Newsweek. Before we wrap up, I'd like to thank each of our dedicated team members for another outstanding quarter. With our customers top of mind, they work tirelessly each day to overcome the obstacles facing our industry, and I am so deeply appreciative of their efforts. With that, let's open the call to your questions. Operator, please provide our participants with instructions.

Of course. If you'd like to ask a question today, please press star followed by one on your telephone keypad to enter the queue. When preparing to ask your question, please ensure your headset is fully plugged in and unmuted locally. That's star followed by one to ask a question today. And our first question comes from Mike Rehort from J.P. Morgan. Mike, your line is open. Please go ahead.

Hi, good morning. I'd love to go on to Mike. Just a quick question on how you're looking at seasonality and if you think sales pace moving forward would be roughly in line with normal seasonality or something historical patterns.

Yeah, good morning. Thank you for the question. You know, when I think about seasonality, if we look at more historic times, I would tell you that Q1, Q2 is kind of the peak. and are generally flat with each other. And then we would generally see a moderation as we go into the back half of the year. You know, I try to take the COVID 2021 period out of kind of the seasonal trends. And when we do that, generally we'll see paces in the back half of the year drop, you know, 10, 20% as we kind of get into the late summer and um, holiday season, and it feels like we are going back to a more kind of normalized pre COVID environment. Um, right now we have our sales teams focused on really managing paces. And as I said, in my prepared remarks, looking at something, you know, in that low three range, certainly in, um, the season and probably with a little bit of mod, uh, you know, um, moderation. As you get into the back half of the year.

Great, thank you. Um, secondly, just, you know, given the, the market guide increase just. Where you guys are expecting construction costs and incentives to go. For the rest of the year, and I guess moving into 2024 as well.

Yeah, hello and thanks for the question. I think your 1st comment was construction costs relative to construction costs. Um, they've been pretty sticky. Um, we've been riding the tailwinds of lumber, um, for the year so far, but the recent start pickup kind of that's going on nationally, it's probably going to put that under some pressure and the rest of the items, um, relative to the other components of the house still remain to be pretty sticky. And, uh, that's kind of what we're expecting for the rest of the year. Um, we do expect potentially as we look forward, um, You know, with new starts, we're seeing some improvements. If we look across some of our divisions based on what we're looking at for Q2, from a start standpoint, we do see some savings in some of our divisions on a go-forward basis. But overall for the year, we still think they'll be still pretty sticky.

You think it's fair, Kurt, that, you know, we're seeing some benefit in some markets on the material side, But labor is still very strained. And so we're not really seeing any relief there. You know, it's kind of interesting. It's almost like our higher the markets that did so well over the past couple of years and had significant kind of gains in both price and pace, feeling a little bit more pressure. And that's where we're seeing a little better relief. But to Kurt's point, if you look across the portfolio, it's not what we had initially hoped for.

I would agree. And then I think the second component of your question was on the incentive front. Just anecdotally or just from what we're seeing, we did see our incentives on new orders drop sequentially from Q1 to Q2. And I think on a go-forward basis, I think a lot of that will be determined based on what the interest rate environment does. But we're very pleased with the reduction in our incentives from Q1 to Q2 on a sequential basis.

Great, thank you.

Thank you.

The next question comes from Carl Reichardt from BTIG. Carl, your line is open. Please go ahead.

Thanks. Morning, everybody, and welcome permanently, Kurt. I had a question just on this particular quarter and the delivery volume. It was well ahead of the midpoint of the guidance range, I think 18% or so. Can you walk through for me when you gave that guide, in April, what changed in the next two months to get that number so much higher? We've seen it from other builders, but yours was particularly strong relative to the guide.

Yeah, it's a fair question. I'd say it's a couple things. One, we just had better ability to get the stuff that was in the last, I would say, two, three weeks of the quarter across the finish line. You know, in the past year, Carl, we would generally have expectations for certain closings and the labor market is just so constrained that, you know, we just we couldn't quite get them across the finish line. And this quarter we were able to. And we really have set ourselves up to make sure that some of the woes of the past couple of years aren't continued and that houses were going to get complete. So we gave ourselves the time. But with the improvement in cycle time, It just helped and I think that combined with great success in the spring selling season with our spec sales, our inventory sales, they were even stronger than we had anticipated. Really one of the strongest quarters we've seen on an inventory front. You put the two together and you're right. We did have a really nice quarter and a big beat, but it did put a little pressure on our third quarter.

I got you. Thank you Cheryl. And then bigger picture question, you've talked a lot in the last few years about growing scale, and you've bought a couple of large public companies to help to add to that. So you're now at this level where you've got 11,000 deliveries this year with some growth coming next year, it sounds like. How are you thinking about scale optimization now? Are you as large as you want or need to be in the markets that you want to be? Or are acquisitions or additional sort of stair-step growth for you still on the table, Cheryl, as you look at the company today? Thanks.

Another great question. You know, we are very focused as an organization on maximizing kind of the scale of each of our markets. So I would tell you, and you know, what does that look like, Carl? It's a little different market by market, but certainly I think, you know, a top five position in some markets is top three, but we all know the benefits of scale when it comes to kind of land acquisition, people, Kind of construction cadence. So do I think there's room to run actually quite a bit? I would say some markets were at scale, but he At what I would say good scale today, but when I look across the portfolio, I think there's a couple significant opportunities One is additional scale and a number of our markets. I think there's only one or two that I would call sub scale but I think there's many others that have just a lot of room to run if we're in the top, you know six or seven and And then I think there's complimentary markets, you know, we have to look at those opportunities as they present ourselves as we've talked about before Carl there's going to have to be a good strategic fit. they're going to have to be a creative to the portfolio so we'll see if those opportunities, but I think certainly we're most focused on organic growth. But we'll continue to look at the opportunities that I think will present ourselves in the coming year, given the stress that the private building communities feeling.

I appreciate that. Thanks so much, y'all.

Thank you. Thanks, Carl.

The next question comes from Matthew Booley from Barclays. Matthew, your line is open. Please go ahead.

Good morning. You have Elizabeth laying it on for Matt today. So I just kind of wanted to touch a little bit on the margin differential. I know that you said that the 2Q – or 2 – second half margin. will be lower on account of the greater portion of spec closings. Would you mind kind of refreshing what that the margin differential is between the bill to order and spec homes is?

Yeah, hi Elizabeth. Yeah, just to reiterate, you know the margin guide for the back half of the year for Q3 is really impacted by mix. We've got a higher percentage of of, I guess, our West Coast markets closings contributing to the overall closing profile for Q3. And then on top of that, it's just a mix of product relative to communities at probably more what I would call more affordable price points. And as you mentioned, we are seeing that our differential, our spread between to-be-built and our spec homes is returning to what we would call more normalized levels. That's right around 300, 400 basis points, roughly speaking. Some are a little bit higher, some are a little bit lower, but overall it's kind of rounding out into that kind of area.

Okay. Thank you. That's helpful. And then kind of digging into the pricing a little bit more, would you mind touching on the regional trends, maybe where you're seeing pricing move higher and if there are any markets where you're seeing, I know that you said the incentives had stepped lower, kind of where you're seeing that, if it's more widespread or if there are particular markets that are seeing that.

Yeah, I think the follow-up on Kurt's comments, because I think they do go hand in hand when we look at the back half of the year and where we have what I would call most affordable inventory, that would be in some of our markets like Orlando, Houston, Austin, even Southern California. when we look at our specs, when we look at the pricing in those markets, if I look across second quarter, as I mentioned I think in my prepared remarks, we raised prices in more than half of the communities across the organization. You know, some of those are modest, some of those are a little bit more meaningful. We're actually seeing those opportunities really across all markets. I would probably say that the exception might be Portland, where I think it's been a little bit more difficult to get some real pricing traction there. But when I look at markets like Florida, we're seeing nice pricing opportunities. Certainly parts of Texas, Dallas just had its best quarter of sales in more than two years. And we've really just begun the growth in that marketplace. We're seeing opportunities with the active adult buyer across the country with pricing strength. And then another probably call out for me would be Sacramento, where we really are offering minimalist incentives in that market. So we're getting that pricing power in different ways based on the market. But we're really seeing it across the entire portfolio.

OK, thank you very much. I appreciate it.

You bet.

The next question is from Truman Patterson from Wolf Research. Truman, your line is open. Please go ahead.

Hey, good morning, everyone, and thanks for taking my questions. First, I believe last quarter you all mentioned that specs were about 60% of your orders during the quarter. Could you give an update on how that trended in 2Q? And I'm really trying to understand you know, are you comfortable running in that kind of 60% level for the foreseeable future, which seems, you know, a little bit elevated versus history?

Hey Truman, how are you? Yeah, for Q2, our spec and to-be-built mix was pretty consistent with Q1. We were in the upper 50% from a QMI standpoint or spec standpoint. And then, of course, the reciprocal of that would be in that kind of low 40 kind of range. So pretty consistent quarter over quarter. Kind of on a go forward, I guess, to your point, we like kind of our balanced approach between spec and to be built. I think it offers the best of both to us. We think that will hover anywhere one way or the other, 60-40, 40-60 over time. And we continue to like that balanced approach. We have our strong to be built business and our resort lifestyle kind of communities and our move up communities. And then, you know, then we attack the more spec business from an entry level standpoint. And we also doesn't mean to say we don't have specs in our move up, but we kind of attack it more so from the entry level standpoint. But we we continue to appreciate the balanced approach.

It's really going to come down to the portfolio that's open for sale. To Kurt's point, I don't think it's going to move materially off the 50-50, maybe 10% each way. But I think the key point is we generally put the majority of our specs in the more affordable communities, as he said. Those tend to be lower margin communities as well. But we'll continue to keep them in the market. Trumann, but I don't think we're going to manage to a specific ratio. It's more about having the right inventory based on what's available in our communities.

Gotcha. Understood. And big picture, you know, pre-COVID, Ural's gross margin had been running, we'll call it in kind of the 18% range, and clearly you've done a lot of work on integrating the prior acquisitions and streamlining your, your business model. I'm, you know, hoping you might be able to discuss where you think, you know, normalized gross margins are today, given all the work that you've done the past few years and realize there's a lot of moving parts with a robust pricing, you know, over the past few years and costs, et cetera, but hoping to see if you have like a baseline.

You know, I don't think I can really change off the answer I've given in the past because we're not prepared to talk about, but good try. But the same that we talked about last quarter, and that is I think that margins are going to stabilize at certainly, let's talk industry, Truman, at levels higher than what we saw pre-COVID. I mean, the infrastructure is different in the industry. Certainly when I look at our company, we're quite different. One, from a scale standpoint. Two, just the discussions we've had about what we've done in our plan library, our simplification on the specs. It's made a meaningful difference when you look at the scale of the builders versus the resale. All those things are making a difference. So I think generally what was the old high teens, low 20s moves up. I think as we get into next quarter, we'll be able to say how far. I think you can see in the traction that we've had moving from 18-19, and ours wasn't only the work that we've talked about on the simplification front, it was also when you think about the integration of those builders, their baseline was something that was even lower than ours. So we had a catch up to do, but it was clearly the right thing for us because it gave us a new scale and a new opportunity. So I look forward to kind of a reset for us, and I think it's at a much higher level than anything you saw in the prior organization.

Perfect. Thank you all, and good luck in the upcoming quarters.

Thanks, Truman. Thanks, Truman.

The next question comes from Jay McCandless from Wedbush. Jay, your line is open. Please go ahead.

Hey, good morning, everyone. So Cheryl wanted to ask first, I think you said in the prepared comments that online leads are converting at 47% this quarter. Is that correct? And maybe could you frame where that might have been a year ago and where you think that number could go?

Yeah, thanks for the question. The conversion was at 47%. The overall participation of our reservations to our sales was at 16%, and I can complicate it just a little bit more, Jay, because when I look at folks that partially reserved but then stopped the process and came in, that moves it to 20%. That's up more than 50% year over year, so it's a very meaningful number. If I were to give you a little color on it, it's been just an interesting trend. I think our highest percentage of reservations are coming out of Texas, which to me is unique. I would have expected those in places like the Bay, but highest overall reservations are coming out of Texas. As you know, earlier this year, we also introduced our to be built reservations and those have tripled actually since we introduced them really the end of last year. So that's been interesting. The to-be-built reservations are actually converting at the highest rate, only to be followed by our spec reservations. Another interesting stat, Jay, is we're seeing the majority of folks that are making reservations are doing it before they come into a community. And they're finding the reservation system relatively organically just because of the convenience that it provides them. And then maybe the last stat that I think is equally exciting, and I think this goes to your second part of your questions on where do we go from here, is it's pretty well divided between all of our consumer groups. I mean, millennials are leading the way at about 40%, but Gen Xs are low 30s and boomers are high 20s. So we're seeing kind of a take up across all consumer groups, which I think just talks to the overall

kind of change in the way the consumer engages with brands today that's great thank you cheryl appreciate all the detail on that um my second question i think you talked about um potential opportunities in the land market um i guess is that something that maybe could start to move the community account on a net basis higher as we go into fiscal 24 or maybe just What are you seeing in the land market and what types of opportunities for net community growth do you see out there?

Hi, Jay, it's Eric. Yeah, we are seeing opportunities. That is definitely the expectation, you know, with kind of our growth expectations and taking up our land spend will ultimately generate future community account growth. With regard to, you know, opportunities and kind of the, maybe I'll just give you a little bit of color on the land market. It's competitive out there. What's been a little bit surprising to us, you know, we saw this kind of huge increase in land prices in 21 and 22, and we were, as you know, a little bit more shy during those times. As the market has kind of evolved and the consumers come back stronger and we've kind of garnered this confidence that's kind of leading us to increasing our land spend expectations, The landmark has gotten competitive, but we're not seeing huge increases in prices necessarily. What we are seeing is competitiveness on speed. So being able to move quickly really has become a competitive advantage as we see it across the landscape, followed with the starting to go away of terms on deals. So that's kind of dissipating a little bit. But we're not seeing the huge lift in pricing on land that we've seen in prior cycles so far and that's really showing up in our when you look at the residual right yeah from an underwriting standpoint we've been able you know prices for land are up but we have been able to consistently hold our gross margin expectations which really falls into kind of that land residual ratio so we're comfortable with the way that our deals are flowing with regard to those expectations yeah

Great. And then if I could sneak one more in. Cheryl, I was surprised and encouraged to hear you say that Phoenix is starting to get a little bit better. Maybe could you touch on some of those markets like a Phoenix, Austin, Denver that were really problem markets last year and how those are faring now?

Yeah. Phoenix, and I think I neglected, so thank you for asking the question, Jay, because I think I neglected in my last comment to mention Phoenix is doing really, really well when I look at kind of their their budget and expectations and both pace and kind of new openings. And just across the board, we've seen really nice strength in the Phoenix market. So that's been very, very encouraging. I mentioned Dallas, where we've seen the best quarter of sales. And, you know, sometime last year, Dallas was struggling. You know, Austin would be another market that would be worthy of a mention because it certainly had one of the greatest peaks along with Phoenix. both in price and pace. That one's been interesting. I think paces, gross paces have continued relatively strong. The market's been plagued with a few more cans than I would say many of the other markets. The net's holding in there and I think it's finally the cancellations have started to dissipate, but it took longer than we may have expected. But we're continuing to see good strength there. I can't forget to mention the Carolinas. I mean, some of our highest paces in the country came out of Charlotte, I think only to be followed by Orlando. And interestingly enough, Seattle was our third highest pace in the country. So without being redundant, we're seeing good strength really across the market. It's been a nice first half of the year.

Great. Thank you for taking my questions.

You bet.

The next question comes from Helen Ratner from Zelman. Helen, your line is open. Please go ahead.

Thanks a lot. Hey, good morning. Thanks for the time. Hi. Kurt, congratulations. Maybe I'll throw a question your way first. You guys were very active repurchasers the last few years and have taken a little bit of a pause here year to date. Just curious if you can give some updated thoughts. I know you mentioned share repurchases are still a part of your capital allocation strategy, but is there any specific reason why you haven't been active year to date? Obviously, the stock is up a lot. Maybe that's the reason, but any color you can give along with how we should think about the pace going forward.

Yeah. Uh, hi Alan. Nice talking to you. Um, yeah, share repurchase, uh, will continue to be part of our capital kind of allocation framework along with investing in the business and just overall debt management, but specific to share repurchase. Yeah, we haven't bought as much here in the recent quarter or so. Um, but from an opportunistic standpoint, if you think about it again, more longterm, we bought back over 50% of our stocks since going public. In the last 18 months, we bought nearly $400 million worth of our stock back at roughly $26 a share. And I would say that we're going to continue to be opportunistic from a share repurchase standpoint. As you know, our sector is somewhat volatile, and we've been really good at taking advantages of that when it has slipped down and have been very aggressive relative to that. And so we'll continue to be what I'll say opportunistic in our approach from a share repurchase standpoint. And how much do we have left on our authorization? We have $276 million left on our authorization, so we're in good shape there. And like I said, it's going to be a staple of our platform, and we'll continue to kind of be opportunistic as we move through the rest of the year.

Okay, perfect. Thanks for the thoughts there and updates. Second question, Cheryl, you brought up your ESG efforts in the prepared remarks, and I have a question somewhat related to that, somewhat strategic related based on some of your geographic exposure. It seems like the last several months there have been more headlines surrounding certain local issues, such as the water issue in Arizona. Florida has been dealing with some Some issues around property insurance and related to storms there. We've been hearing things in Carolinas related to moratoriums on sewer hookups and things like that that could potentially impact growth going forward. How does all of this affect your strategic planning going forward in terms of where you allocate investment dollars, how you're thinking about the risks associated with that going forward in your footprint? Any thoughts on that front?

Yeah, Alan. Hey, Eric. I'll start. Yeah, from an underwriting standpoint, those are all factors that have to play into account, right? And some of it's by way of just risk mitigation and kind of cost expectation. So you're right to ask the question. It's a factor in kind of our expected future projects for sure. Maybe just to touch on one of them with regard to one you raised, which is the Phoenix water issue. We are here subject to a little bit more strictness with regard to the measuring stick. It's a 100-year supply bar that we need to reach as a market. The government's put in place a water council to help address the issue. The expectation is that they'll come up with a solution over the next three years. I guess the good news or the favorable part of it is that it's got about 80,000 lots that are available in the market. that are already kind of pre-approved, designated. And all of our lots. Yeah, and we've got a pretty good percentage of that. So there's none of our projects that are subject to that risk. We've got about 10,000 lots that are all kind of in that pre-approved. So it's an issue. It's something that needs to be solved over the coming years, but it's not, as of today, kind of a DEFCON 1.

It feels like, and you know, won't go deep here Alan, but it feels some of this, some of these issues that you've mentioned are real. I mean we've had hurricanes, we've got insurance issues, but nothing that's impacting the business. We're all over kind of building codes. When I think about Florida, to Eric's point about Arizona, it feels a little political when you look at the average across the country being a 50-year supply and versus 100. We're in a really good place here and there's still thousands of lots that are available that have designated water. So as we move through the country, to Eric's point, these are all things that our teams are all over. When we think about the sewer in Charlotte, I feel like we've been talking about that for almost two years now to make sure that our growth patterns are appropriate. So there's nothing here that's stopping our kind of growth plans across the organization.

Got it. And just to put a finer point on that, Cheryl, there's nothing that you see out there that is causing you to think about materially changing the geographic mix of your business. In other words, you don't see any of these risks as one being more significant than the other and causing you to divert capital from one market to another.

No, not on any of the issues we've talked about at all, Alan. In fact, I think it's just making sure we have the right people on the ground that are well ahead of them. And that actually allows us to have a strategic advantage in the market because we're better planners.

It's fair to say it's not easy anywhere. Great. I appreciate all the thoughts on that, guys.

The next question is from Mike Dahl from RBC. Mike, your line is open. Please go ahead.

Mike, your line is open. Please ask your question.

Sorry, can you hear me now?

We sure can, Mike.

Okay, thanks for squeezing your in. Sorry about that. One more question on the mix of kind of spec versus to be built. You know, in the quarter, what percentage of your closings did spec represent? And in your guidance for the second half of the year, what's the assumption in terms of mix of spec closings, please?

Yeah, hi, Mike. Our mix for Q2 from a closing standpoint included 60% spec and of course 40% to be built. And right now from a Q3, Q4 standpoint, we're not really guiding to that, but it's contemplated within the mix and within the margin that we're kind of showing relative for the year. But you could probably assume that our percentage of specs will probably be kind of on that higher end as well.

Yeah, and obviously, Mike, everything that's going to make it in the year has to be a spec. Everything from a to be built is already in backlog and started.

Right. I guess just as a follow-up, since the sequential decline in margin is being attributed to spec mix, when we think about kind of the higher end, is it also, is it a function of not necessarily a higher percentage of spec closings, but that normalization in the underlying spec margin? That's the bigger driver, the sequential decline in margins?

I think it's three, Mike. I think it's percentage of spec closings. I think it's just the difference between spec and TB built. And I think the most important point that Kurt really doubled down on is the geographic mix of where those specs are. So a lot of them are in our West Coast. Those tend to operate at a slightly lower margin as well. And it's the most affordable of our products. So it's not just one factor. But it's a combination of all of those.

Got it. Okay. That's it for me. Thanks, Jo.

Thank you.

The next question is from Dan Oppenheim from Credit Suisse. Dan, your line is open. Please go ahead.

Great. Thanks very much. I was wondering, you've talked about that in terms of the margins on the specs versus to be built, and looking at the west where you had some better trends in terms of the absorption, given to the gap that we've seen in terms of the West, in terms of margins? How do you – with the absorption, do you see the margins getting back closer to – closer in terms of where they are relative to some of the other regions, or how much more are we going to need to make on that?

Yeah, good question, Dan. You know, as we said, the margins on our west coast are lower. And that's one of the things that we're working on overall is trying to improve that margin, I guess, profile of our west-based communities. But that will come in time. It's not going to happen necessarily overnight. And we'll continue to work on that. Like I said, we saw some reprieve in our incentives quarter over quarter on our orders. Phil Kleisler- So we'll look to kind of pursue and see what we can do through either price additional price escalation and or cost because, as I mentioned earlier, our costs on our new builds. Phil Kleisler- We probably have the most kind of upside from that standpoint on our new starts probably on our West coast markets because they probably got into the. the fray, so to speak, earliest. And so they've probably gotten some benefit from a house cost standpoint earlier than some of our other markets. So we'll continue to monitor that and kind of push the house cost side and the incentive side and just price elasticity on those because we do know we're going to have to kind of keep pushing that up.

And the only thing I'd add from a historic perspective, Kurt, is to your point, this is a journey and we'll continue. I think the expectation, given some of the master plans and the participation, is the margin will never probably be the same as you see in the rest of the country, the margin percent. But the dollars tend to be much higher. But from a percentage, it will probably trail. But we need to bridge the gap.

The next question comes from Ken Zenner from Seaport Research.

Ken, your line is open. Please go ahead.

Good morning, everybody. Congratulations. I wonder, could you talk about your, certainly if you could talk to your option land portfolio, what percent of that is expected to be finished? And can you talk about the logic thinking motivation you have for Ken Bacon- get had taken that down raw or finished, first of all, thank you.

Eric J Kratt- yeah i'll give that a shot can this is Eric and then feel free to chime in Kurt. Eric J Kratt- You know, we will always have a preference for for kind of finished lots as part of the mix those are good to have as part of the portfolio, but. The fact of the matter is, with the cycle evolving, a lot of the developers have stepped to the sidelines. They are coming back now in terms of the land acquisition, so I think that'll change favorably in the future. But fortunately, we've got a development engine and we're good at it. So we have seen most of our land coming through, about 70% come through in a raw condition by way of underwriting. And so that's something that I think will persist in the future going forward. We've seen it. We're certainly hunting for finished lots, but the availability of it has been somewhat diminished.

Thank you very much. And then, Cheryl, you mentioned Sacramento. I'm in Northern California. Our research, really going back to the early 60s, shows a secular decline in inventory when one has a secular rise in rates, which the duration, I think, is It's a fair point to observe that right now. So can you talk to, given weakness in jobs and tech, et cetera, at Northern California and the strength in Sacramento, despite it being affected by tech, could you talk to what that buying pool is looking like? Are they in market? Because obviously people are leaving California as well, but more detail there would be appreciated. Thank you.

Yeah you bet. You know I think Sacramento has always been an interesting mix and Kurt jump in here if I miss something but I think Sacramento has always been an interesting mix of in-market kind of movement and depending where we are kind of on the pricing cycle we get a lot of inbound from the bay and sometimes that can be a very high percentage of total sales and sometimes it completely dissipates. You know we've added our active adult our resort lifestyle penetrations into the market and once again interesting that's really been kind of an in-state buyer as I understand it. Some movement from the bay as people are approaching retirement but when I look at you know I think we have just continued opportunity here for outlet growth when I look at our paces In the first half of the year, they were, you know, 50% higher than we saw in, you know, kind of historically low cancellation rates. The margin has just been really, really healthy for us. So we're excited about the penetration, and I think you'll see us continue to grow. I know that with the second active adult position, and I think the family buyer as well.

Thank you.

The next question is from Alex Barron from Housing Research Center. Alex, please go ahead. Your line is open.

Yeah, thanks for fitting me in here at the end. I'm not sure if you answered this or if I missed it, but, you know, given how much you guys beat on the deliveries versus your guidance and then your guidance is back down to 2,600, I'm just trying to understand, you know, what affected that, you know, such a big beat and why it wouldn't continue at a similar pace? Is it related to your bill time or did you just accelerate a bunch of closings for some reason that can't happen in third quarter?

Yeah, as we said, Alex, we certainly were able to bring some in from Q3 to Q2. So that was a small piece of it, but I think what really is the driver, correct me if I'm wrong, Kurt, but I think it's a two-part. I think it's that you know we slowed down starts at the back end of the year given what we saw happen to interest rates and the demand fall off and then that unfortunately got compounded in early in the year especially in the west coast where we saw significant rain and we lost a few weeks of starts so you put all three of those factors together in our universe um it's just not as large Hopefully, we'll see something about what we gave, but we just don't have the same universe in Q3 that we did in Q2. But as you see, Alex guided up for the year, so this is just strictly a timing piece for Q3.

This concludes today's Q&A session, so I'll hand the call back to Cheryl Palmer for any closing remarks.

Well, thank you all for joining us on this very busy earnings day, and we will look forward to talking to you next quarter.

This concludes today's call. Thank you very much for your attendance. You may now disconnect.