Taylor Morrison Home Corp. Class A Aktie

Good morning, and welcome to Taylor Morrison's First Quarter 2026 Earnings Webcast. [Operator Instructions]. 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. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements. These statements 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 where applicable. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Eric Heuser, our Chief Corporate Operations Officer. I am pleased to share the results of our first quarter performance and look forward to providing an update on the progress we are making towards our strategic priorities for the remainder of the year. Our first quarter results reflected the effectiveness of our diversified strategy, the quality of our core locations and the disciplined execution of our teams. We delivered 2,268 homes at an average price of $578,000, generating home closings revenue of approximately $1.3 billion at an adjusted home closings gross margin of 20.6%. This drove adjusted earnings per diluted share of $1.12 and 11% year-over-year growth in our book value per share to $64. On the capital front, we invested $503 million in land and development and $150 million in share repurchases and ended the quarter with $1.6 billion in liquidity.

As I shared on our last earnings call in February, early signs heading into the spring selling season were positive, and the quarter played out largely as we expected. With sales activity building through the quarter and March representing our strongest month. That momentum is consistent with normal seasonal patterns, albeit with slightly less acceleration than we have seen historically, reflecting continued consumer cautiousness. April started off somewhat slower as typical, coinciding with the holiday weekend, but momentum then picked back up, and we're looking forward to a strong end to the month, even with all the headline noise.

Most importantly, as we prioritize the balance between price and pace, we achieved our first quarter sales with a significant increase in the share of to-be-built orders to 38% from 28% in the fourth quarter. As a result, we began to rebuild our backlog, which increased 23% from year-end to 3,465 homes. As we anticipated, this reacceleration in demand for to-be-built homes suggests that historic bio preferences are reemerging as excess spec inventory is cleared across the industry, and our new community openings support compelling value propositions for our shoppers to personalize their new home.

One way in which we are helping drive this shift is through design center open houses, which enjoyed record attendance in the first quarter at over 140 events across the country and drove to-be-built sales activity with a strong average conversion rate of 23%. We are further supporting this shift with mortgage incentive programs that provide confidence to our build-to-order customers and enhance their buying power, generally at less cost than incentives required for spec sales.

In addition to this favorable mix shift, we also realized more than a 100 basis point sequential reduction in incentives on new orders. And lastly, we made significant progress in selling through our finished inventory, which declined 30% from year-end to 863 homes as we reach targeted spec levels in most of our communities. We have positioned 2026 to be a year focused on setting the stage for reacceleration of growth in 2027 and beyond. This includes a plan to open more than 125 new communities this year, roughly 30% more than we opened in 2025, including about 40 that already opened in the first quarter. supported by an enhanced community opening framework that is helping our teams execute these openings successfully, another 45 or so communities are scheduled to open this quarter during the remainder of the selling season.

These openings support our expectation that we will end the year with between 365 to 370 communities which would be up 8% at the midpoint compared to 341 communities at the end of 2025. These communities will generally begin contributing closing later in the second half and into 2027. I'm particularly excited that over 20 of these new openings are in Esplanade communities. This includes the anticipated grand opening of our first Esplanade in Nevada, providing unmatched views of the Las Vegas skyline. This community is already enjoying significant interest with a 1,400 plus lead list and is expected to command record lot and option premiums, with Esplanade consistently generating superior home prices mid- to high 20% gross margins and strong demand resiliency the growth in this unique segment of our portfolio is expected to be an important driver of our future performance.

Since we last spoke, the market has been faced with another round of geopolitical turmoil intensified macro uncertainty and a shift higher in mortgage rates. As we would expect, consumer confidence has been impacted by these developments, exasperating affordability constraints and AI-related employment concerns. However, we believe the underlying desire for the homes and communities we build remain strong even as the broader macro environment has given consumers a reason to be more deliberate in their decision-making.

On the policy front, we continue to have positive dialogue with the administration regarding how we and the industry can contribute to enhanced affordability and housing accessibility. While any solutions are likely to be incremental, we are encouraged by the ongoing focus on this issue and are pleased with the progress we are making in advancing constructive proposals. Erik will touch on read-throughs to our Yardley business in just a moment.

Before I turn the call over to him, I want to touch on the progress we are making in technology. Our online reservation system continues to be a standout example. In the first quarter, we recorded over 1,000 reservations with a 58% conversion rate. Reservation buyers continue to transact at a higher average selling price with stronger option attachment than our nonreservation sales. Encouragingly, we achieved the lowest copra rate we have seen in years, reflecting the power of our reservation platform. On the AI front, we now have more than a dozen AI-powered applications in production across finance, sales, purchasing and customer experience and adoption has more than doubled year-over-year with over 2.4 million internal AI interactions recorded in the first quarter alone compared to approximately $3 million for all of last year.

On the customer-facing side, our AI-powered contact center is delivering real-time agent coaching and dynamic scripting on every customer call with automated quality management applied consistently across all interactions driving improved customer satisfaction and sales outcomes. These investments are translating directly into results with an increase to more than 11,000 online sales appointments generated in the first quarter. We are achieving all of this through technology and automation, not incremental spend with more than half of these capabilities built in-house by our own teams.

As a result, our overall technology costs are declining even as these capabilities continue to scale. There are many more initiatives advancing through our project management office that I look forward to sharing as they go live in the months ahead.

In closing, our ability to reaffirm our full year 2026 guidance in the face of a more challenging macro environment speaks to the underlying strength of our business and the effectiveness of our diversified strategy. We are concentrating our resources where we have the greatest competitive advantage, managing costs and capital with discipline and positioning Taylor Morrison to establish an even stronger and more differentiated portfolio. I believe the actions we are taking today will seperate us in the years ahead as we look to continue creating value for our customers, our communities and our shareholders.

With that, let me turn the call to Erik.

Thanks, Sheryl, and good morning, everyone. At quarter end, we owned or controlled 75,626 homebuilding lots, of which 51% were controlled off balance sheet. While our controlled ratio has recently declined due to normal first takedowns and our active reevaluation of our deal pipeline against current market conditions, we still intend to manage toward our long-term target of at least 65% control.

Based on trailing 12-month home closings, we owned 3 years of lots out of a total of 6.2 years of the controlled supply, which we believe is the right balance in today's environment. As Sheryl laid out, our land investment strategy is focused on core, well-located communities that serve our discerning customer base with approximately $2 billion of planned homebuilding acquisition and development spend in 2026.

In the first quarter, we invested $503 million comprised of $279 million for lot acquisitions and $224 million for development. As we deploy this capital, we will remain prudent and balanced in our use of land financing tools. These include seller financing, joint ventures, traditional option agreements and land banking, and we selectively deploy each as we seek to optimize cost, risk and return at the individual asset level. Our preference is seller financing when available as it tends to be the lowest cost. When it is not, we evaluate JV structures, traditional options or land banking. The result is a diversified and flexible pool of structures that allow us to cost-effectively control lots off balance sheet or defer cash outflows to improve our returns and manage our portfolio risk.

Given the increased investor focus on land banking, I wanted to share some perspective on this topic. As of quarter end, approximately 10,000 of our controlled lots were in a land bank representing approximately 13% of our total lot supply and about 25% of our controlled lots. Our remaining control lots were spread between 33% in JVs, 26% in single takedowns and 16% in traditional lot options. To further put our selective use of land banking in context, in the first quarter, only 6% of our lots approved by our investment committee were tagged to be financed via a land bank. We believe this balanced approach is a source of competitive advantage and one that is reflected in our relative gross margin performance with only about 25 to 30 basis points of capitalized interest in the first quarter attributable to land banking and seller financing related project financing.

Turning to another area of focus, our build-to-rent platform Yardly develops purpose-built, single parcel horizontal apartment communities. We have been encouraged by our engagement with policymakers and their general recognition that Yardly's model is fundamentally distinct from the scattered single-family rental activity targeted by our recent legislative discussions, and we continue to believe we are well positioned as that policy dialogue evolves with flexibility around product and execution optionality.

Operationally, we closed on the sale of 1 JV-owned Yardly community for approximately $41 million during the quarter. We now have 16 projects actively leasing and an additional 13 projects currently under development. Supported by our land bank, roughly 90% of Yardly's total units are controlled off balance sheet with a total investment of approximately $320 million at quarter end. While we await greater clarity on the regulatory front, we remain confident in the long-term demand dynamics for this unique rental offering that provides affordable housing solutions for those seeking an alternative to traditional multifamily apartments, often before being ready to commit to home ownership. Now I will turn the call to Curt.

Thanks, Erik, and good morning, everyone. I will begin with the details of our first quarter financial performance and then review our guidance metrics. For the first quarter, reported net income was $99 million or $1.01 per diluted share, adjusted net income was $109 million or $1.12 per diluted share after excluding inventory impairment charges, of $8.2 million and pre-acquisition abandonment charges of $5.6 million. This compares to reported net income of $213 million or $2.07 per diluted share and adjusted net income of $226 million or $2.19 per diluted share in the first quarter of 2025.

Both closings volume and average selling price came in roughly in line with our guidance, with 2,268 homes delivered at an average price of $578,000 generating home closings revenue of approximately $1.3 billion. This was down from $1.8 billion in the first quarter of 2025 driven primarily by lower closings volume. Our adjusted home closings gross margin of 20.6% came in stronger than our guidance of approximately 20%, driven by several factors, including favorable costs as well as product and geographic mix during the quarter.

On a reported basis, home closings gross margin was 20%, inclusive of $8.2 million of inventory impairment charges. This compares to an adjusted gross margin of 24.8% and reported gross margin of 24% in the first quarter of 2025. As anticipated, the decline reflects a higher mix of spec home closings and elevated incentive levels. Looking ahead, we expect that our margin trajectory will be shaped by 2 offsetting dynamics. On one hand, the recent rise in mortgage rates in a more cautious demand environment are likely to sustain the incentive pressure. On the other hand, the progress we are making in rebuilding our to-be-built sales mix is a tailwind. To-be-built homes carry higher gross margins than spec closings. And as those sales convert to closings, we expect this mix improvement to be the primary driver of margin recovery.

On balance, we continue to expect gradual margin improvement beginning in the second half of the year with the pace and magnitude dependent on how the sales and interest rate backdrop evolve through the remainder of the selling season. This also assumes relatively stable construction costs at mid-single-digit lot cost inflation. SG&A expense was $149 million in the first quarter or 11.4% of home closings revenue compared to 9.7% in the first quarter of 2025 due to the deleveraging impact of lower revenue. However, in dollar terms, SG&A expense was down $28 million or 16% year-over-year, driven primarily by lower commission expense and payroll costs as we have effectively managed our overhead structure.

As closings ramp through the year, we expect the SG&A ratio to improve toward our full year target in the mid-10% range. Now to sales. Net orders in the first quarter totaled 2,914 homes, down 14% year-over-year at an average selling price of $603,000, up 2% versus the prior year. Our monthly absorption pace was 2.7 net orders per community, up from 2.4% in the fourth quarter of 2025, but below 3.3 in the first quarter of 2025. We ended the quarter with 356 active selling communities, up 4% both sequentially and year-over-year. Cancellation trends remained manageable with our cancellation rate at 10% of gross orders in the quarter, down from 12.5% in the prior quarter and from 11% a year ago. This was the lowest cancellation rate since the third quarter of 2024.

Turning to starts. We started 2,371 homes in the first quarter. or approximately 2.2 homes per community per month. This compares to a monthly starts space of 2.1% in the prior quarter and 3.3% a year ago reflecting our management of spec production as we work through existing inventory. Going forward, we will continue to roughly align our starts pace with community-level sales activity. With cycle times down more than 1 month year-over-year, we have greater flexibility to start and close homes, including to-be-built orders within the year. We also made progress in working through our finished spec inventory during the quarter. Finished specs declined 30% sequentially to 863 homes while total specs declined 9% to 2,692, which is roughly in line with targeted levels. Net interest expense was $11.2 million in the first quarter compared to $8.5 million in the prior year, reflecting land banking activity. This is consistent with our prior guidance, the net interest expense would increase modestly year-over-year.

Our financial services team achieved an 88% capture rate in the quarter, stable compared to a year ago, supported by competitive mortgage offerings and strong alignment with our homebuilding operations. Among customers using our mortgage company, the average credit score was 750. Average household income was approximately $181,000, average loan-to-value ratio of 80% and an average debt-to-income ratio of 39%, reflecting the financial quality and resilience of our buyer base.

Turning to our balance sheet. We ended the quarter with total liquidity of approximately $1.6 billion, inclusive of $653 million of cash and no outstanding borrowings on our revolving credit facility. Our net homebuilding debt to capitalization ratio was 20.5%, unchanged from a year ago. Our next senior note maturity is not until 2028. We remain committed to disciplined and returns-driven capital allocation, including the return of excess capital to shareholders after investing in profitable growth opportunities.

During the quarter, we repurchased approximately 2.5 million shares of our common stock for $150 million at an average price of $61 per share. We continue to target $400 million of share repurchases this year with $863 million remaining on our $1 billion authorization, which expires in December of 2027, Despite the evolving market backdrop, we are pleased to reaffirm our full year 2020 guidance across all key metrics, including approximately 11,000 home closings at an average closing price of $580,000 to $590,000. Our ending community count is expected to be between 365 and 370 by year-end. We expect our SG&A ratio to be in the mid-10% range of home closings revenue and our effective tax rate to be approximately 25%.

In terms of capital allocation, we expect our homebuilding land investment to be approximately $2 billion. Lastly, we expect to repurchase approximately $400 million of our common stock leading to an average expected diluted share count of approximately $95 million for the full year. For the second quarter, we expect to deliver between 2,500 to 2,600 closings at an average closing price of approximately $575,000 and a home closing gross margin of at least 20%, excluding any inventory-related charges. We expect our ending community count to increase to around 370. Our second quarter effective tax rate is expected to be approximately 25.5% and our average diluted share count is expected to be approximately $95 million.

Now I will turn the call back over to Sheryl.

Thank you, Curt. As I reflect on the first quarter, I am proud of what this team delivered in a market facing elevated uncertainty and consumer caution, we exceeded our gross margin guidance, rebuilt our backlog, made meaningful progress on spec inventory and reaffirmed our full year outlook, all while continuing to advance the strategic priorities that will define Taylor Morrison's next chapter. None of this happens without the dedication and discipline of our team members who show up every day to serve our customers and execute our strategy. To our team, thank you. Your commitment is what makes this company exceptional.

Looking ahead, I'm confident in the strategic direction we have chartered. The pivots we are making, concentrating our portfolio in the strongest markets and consumer segments, scaling our footprint and especially our Esplanade resort lifestyle brands, improving our sales mix and deploying technology to drive efficiency are already bearing fruit. As we continue to execute through 2026, we're laying the groundwork for a reacceleration in 2027 and beyond. I look forward to sharing our continued progress with you. Thank you to everyone who joined us today. Operator, please open the call to questions.

[Operator Instructions] Your first question comes from the line of Matthew Bouley with Barclays.

You have Elizabeth Langan on for Matt today. I was wondering if you could touch -- I was wondering if you could touch on the maybe your expectations around the cadence of margin [indiscernible] quarter with your 2Q guide is implying maybe a plan to step down and then you noted that things should improve through the back half as you increase your mix of tubibuilt homes. Is that going to look more like a onetime step up? Or is that going to be more of a sequential improvement throughout the year?

Elizabeth great question. Maybe just to kind of start with kind of Q1. In Q1, as we alluded to in our prepared comments, we did have several factors that went into the margin, and I just want to touch on a couple of those relative to the mix. So on the mix front, we did close more homes than anticipated in our higher-margin divisions. So that was a key contributor. We also closed more to-be-built in the quarter than anticipated as we pulled some in from Q2 into Q1.

And finally, what I would say is we closed fewer homes on lower-margin homes that we had anticipated and now have moved into Q2. So when we begin to think about the margin guide for Q2, all of those are then going to reverse and have that impact for Q2, which is kind of one of the main drivers as we looked at developing the guide for the quarter. And so we looked at cost mix, incentives, higher interest rates and where we kind of landed was when we look at maybe 3 key areas: the reverse of the mix dynamic in Q1; two, the continued kind of moving through and clearing our inventory; and three, just the higher interest rates that are in the market. And of course, we tend to work with all of our consumers on a one-on-one basis to make sure we're maximizing the efforts for each person's situation. And so that's kind of behind the backdrop from a Q2 perspective.

And then when we begin to think about Q3 and beyond, we haven't necessarily guided to that. But based on the progress that we've done relative to clearing the inventory and increasing our to-be-built mix of sales in Q1 we do continue to expect to see that mark a gradual increase in our margins in the back half of the year. Now the tough thing about that is what is the magnitude of that? And that's going to be highly dependent on interest rate, the market backdrop, consumer sentiment, a bunch of different things. But if all things hold here today, we would expect a gradual increase in margin in the back half of the year.

Okay. And kind of a follow-up to that. With the potential for the gradual margin increase throughout the year, is that -- can you maybe speak about incentives, like how much that could play into it? And are you assuming that, that 100 basis point step down. Is that something that should be consistent throughout the year? Or was that more a onetime step down in 1Q?

Elizabeth, this is Sheryl. Thanks for the question. The 100 basis point sequential reduction, I believe, was a real positive. And reflects a number of different factors. The mix, as Curt mentioned, the mix of to-be-built versus inventory homes with that 100 1,000 basis point improvement. As you know, these incentives program tends to be less costly. So the mix is a tailwind. And I hope it continues to be with our focus on to be built. .

Even with the progress we made in selling through finished spec inventory, which declined as Curt mentioned, 30%, we were able to be more disciplined in pricing even on the spec home. Some were correlated to competition probably getting off the year and aggressive incentives, but mostly a discipline in how we are how low we're willing to go. I think our sales teams did a great job holding the line.

As I've said before, we aren't going to sell at any cost. We placed just too much value within our communities, and we'll continue to sell them from a position of strength. Some communities are going to be about volume, particularly as we sell out of these more remote locations, but others -- it's all about capturing value. We also replaced in many instances, our most expensive forward commitment programs with another version of our proprietary buy bill program, which is allowing our customers to get a lower monthly payment than some of our most aggressive forward commitment rates I do expect that to continue. And as we've said before, it's all about personalizing a program to meet each consumer's needs. So to your -- will it continue overall, the rate environment will clearly be a factor. And we should expect incentive pressures to persist as long as rates remain elevated.

That said, we are very focused on community by community optimization using every tool available to balance that pace and price as we did in the first quarter. I'd say, in total, we're cautiously optimistic that incentive levels will stabilize, but we'll be prepared to adjust as the market dictates.

Your next question comes from the line of Mike Dahl with RBC Capital Markets.

This is Chris on for Mike. I was hoping you guys could touch on your expectations for start cadence in the coming months and the delivery outlook for the second half of this year, the 2Q guide implies a sequential step down and certain increase in the back half as a result. I just want to get your thoughts on timing there, 3Q vs 4Q on deliveries?

Yes. Chris, I can take that one. Thanks for the question. Relative to the starts cadence, as you saw in Q1, I think we started 2,371 homes, we sold 2,900. So in Q2, and that -- part of that was as we were clearing out some of the inventory. And now as we look to Q2, we would expect our starts to approximate our sales which is kind of what our consistent message has been as -- even though we had to work through some of the inventory on a go-forward basis. So that's kind of what we're aligning to on a go-forward basis for Q2 is aligning our starts with sales. And so you can imagine that we would be taking up our starts in Q2 relative to that.

And the good news is, given what's happened to cycle times, Curt, we can actually start homes, Chris, much later in the year than you've seen over the past. So you'll see much more of an even cadence than this huge spurt to get to the year-end finish line.

Understood. Appreciate that. And just going back to the second half gross margin trajectory. I realize you are putting out guidance, but the modest improvement -- is there any way you could put some numbers around the mix of step up? It sounds like your new communities are slated towards the back half of the year and that is margin accretive. Is there any kind of colocation providers just the mix dynamic alone in terms of delivery timing?

I think it will ultimately depend on the spec sales that we sell and close in the quarter. So it's hard to quantify exactly what that looks like. But as Curt mentioned, we still have a number of finished specs, but we've made great progress. We'll continue to make our way through those in the coming quarters. But as you noted correctly, you will see a heavier back end on the to-be-built based on the success we've had first quarter and our new openings with a high focus on to-be-builds.

Your next question comes from the line of Michael Rehaut with JPMorgan.

Great. I'd love to there's been some encouraging trends, I guess, with yesterday's report by one of your large competitors in this morning around seasonality kind of holding in there -- you alluded to maybe the month starting out -- month of April starting out a little slower but starting to pick up again. And I'm curious, as you look at the trends in March and April, maybe better than peer just given all the macro noise, if you're seeing any relative strength within that across your footprint, either by buyer segment. And in particular, I'm thinking about move-up or active adult or even by region, that kind of stands out in your view is kind of anchored or led the results that you've seen?

Yes. It's a fair question, Mike. As I mentioned in the prepared remarks, April started that first week, the holiday week, just a tad slower but once again, I think when I looked historically when Easter falls, that is pretty consistent. But then momentum immediately picked up, and we're looking forward, as I said, to a strong ended the month, even with all the headline noise we're seeing. But more broadly, I think what we saw through Q1 was pretty consistent with normal seasonal patterns. Sales built through the quarter, with March being the strongest month. In fact, I think we've seen an improvement in sales every month since late summer.

As everyone's mentioned, consumer confidence was clearly has been impacted by the war and just overall macro uncertainty. But as we've said in the past for the most part for our customers, it's about, should I buy now not can I? And so what we're seeing is really the underlying desire for homeownership remains strong. I think last year, we felt a lot of folks were just hanging around the hoop and they've come off the sidelines. Traffic in our communities remain steady. In fact, we had our lowest cancellation rate since the third quarter of '24. So at 10%, I think that says a lot about the way the consumer is feeling. They're transacted. The ones that are transacting are committed and they're qualified.

If I think about some of the regional differences, Mike, you'd expect performance was slightly varied across the market. The West was, I'd say, our most resilient area with orders just down about 8%, and they were led by the bay that was actually up year-over-year. And the rest of the markets in the West were just slightly down. Phoenix was also a pretty nice standout with year-over-year improvement in absorption. I also think as I look across the West markets, they were aided with low resale inventory across each of the markets. And once again, pretty consistent across each of the West divisions. When I move to the East Coast, it was down a bit more 17%. But I'd remind us that Florida had a very strong first quarter last year and some very difficult comps. But either the Florida markets held their own. We saw a nice resurgence in Naples for the season. The Orlando business was probably down the furthest, and that was -- we had a number of closeout and opened new community openings. We also saw a really good mix shift in communities with our average sales price in Orlando, up over $100,000 year-over-year.

When I think about other markets in the East, Atlanta saw the greatest increase year-over-year in sales across our entire company, and that growth came in both community count and pace. And particularly nice to see the job growth in our Florida markets and the continued reduction in new supply pretty much across the entire East.

Central was down somewhere in between the 2 on orders with a shopper -- probably what I describe as a sharper closings decline, partly a function of mix and timing of community life cycle transitions. A number of new openings in Houston and Austin. Austin actually finally saw what I would say, some stabilization in backlog, had the best sales month in quite some time and can seem to stabilize.

So in total, Mike, I think as we continue to shift our strategic priority to core well-located communities, reduced exposure to noncore locations where we've seen just the greatest pricing sensitivity. I think you'll see continued pickup in our central markets. Across all the regions, we're executing on the same strategy, calibrating incentives, pricing community by community, really balancing that pace and price, doing it through differentiating our product. And I should also mention leveraging our online sales capabilities that really were helpful throughout the quarter.

Great. That's a great overview. I appreciate it, Sheryl. I guess, secondly, I'd love to kind of understand incentive trends across your markets as well and don't necessarily have to go through around the around the world per se. But just maybe even on a broader basis on a consolidated basis, how would you characterize incentives as they trended through the quarter? And if you expect, we're starting to hear about some level of stability potentially if you're seeing that and expecting that to persist into the second quarter? And if that has anything to do in your view with how inventory trends may have potentially also started to stabilize as well, both new and existing.

Yes. It's a fair question. We talked already about the 100 basis points improvement in sales. But if I were to talk about it broadly, Mike, I would say similar to past quarters. The most expensive incentives tend to be with our first-time buyer group. Obviously, with the success we're having on the to-be-built, that was part of that was a good part of the 100 basis point improvement. But honestly, just as much of it came through a reduction in our spec incentives. So it was nice to see it in both areas. When I look at the cost of our forward commitments, the more expensive incentives, they were down quarter-over-quarter. When I look at our noncontract incentives, they were down. When I look at our contract incentives, they were down. So I'd say pretty much across the business, the exception would be where we had a higher penetration of specs and first-time buyer business,

Mike, the last thing I'd probably mention on that just because I think it's an interesting stat as we looked at all the numbers is our incentives were down even though we offered the lowest average interest rate as we've seen in a number of quarters. So to think that our customers got the benefit of a lower rate and our incentives were down. It was a nice trajectory.

Sheryl I think as Mike suggested, I think the supply factors are also helping a little bit. If you look at unsold finished inventory, it's really down in almost all markets across the U.S. and the starts per community have kind of rationalized. And so as we think about the general new home inventory, there seems to be some stabilization. And on the resale market, I would say, in a good way, it's somewhat boring. Our markets average about 4.5 months. We've seen real stabilization on listings, only up 1% month-on-month and pricing actually a little bit of pricing power in the markets in resale. So it seems like a general stabilization that's helping that backdrop for both new and resale.

And we saw what about 1/3 of our communities, Curt, with some pricing. That was just base price adjustments. -- obviously, it'd be a much larger number if we considered a reduction in incentives.

Your next question comes from the line of Jonathan Bettenhausen with Truist Securities.

So you made a comment in your prepared remarks about buyer preferences returning to kind of more historical norms. Can you give us some more specifics on what exactly you mean by that? Is that more of a preference towards build to order? Or are you also referring to specific feature of the home as well?

Yes. No, fair question. I think honestly, it was more relating to the shift in the 38% to-be-built orders from the 28% in the fourth quarter. I think an important milestone and reflects what we think is a reemergence of for us, historic buyer preferences, obviously, clearing the spec inventory is helping that I mentioned on the call as well that we have hosted a number of design center open houses, and that's certainly been a key catalyst. We held over 140 events in the first quarter with a 23% conversion. But I think most importantly is that most of those sales were to-be-built sales. So we really saw customers coming in wanting to personalize their house. So I'd say it was more on the mix. But we also saw an overall increase in design center revenues. So I think it's also on the personalization of what they want in their homes.

And also the share of the community, right, Sheryl as you think about 82% of our buyers say that the community is as important as the house. And I think it's beyond just the offering and hopefully, that long-term gravitation to the overall community as well.

And you're saying it's a fair point, Erik, because we're also seeing it in lot premiums being generally slightly up in most divisions, flat overall. So I hope that helps.

Yes, that's helpful color for sure. And then also, it was a strong quarter for the Financial Services business on a year-over-year basis. What kind of went into that and should we expect that performance to continue through the balance of the year?

Yes. Great question, Jonathan. A couple of things that I would say are the main drivers there. One is the high investor demand in the secondary market was very favorable in the quarter. And the second thing I would say is we're operating the business with just a lower cost structure overall. So those are kind of the 2 main contributors to that. As we look forward for the rest of the year, a lot of that will be dependent on, again, that investor demand in the secondary market, and we'll just kind of keep our fingers crossed, and we'll see how the rest of the year plays out.

Your next question comes from the line of Rafe Jadrosich with Bank of America. .

Great. I really appreciate all of the color that you gave on the land banking exposure. Just a couple of follow-ups on it. Can you talk about the like accrued interest or the option maintenance fees relative to what's like flowing through your P&L today. And if it's sort of matched up and how we think about the potential like margin implications longer term? And then how do you think about seller financing like relative to land banking as you continue to sort of increase the option mix?

Yes. Rafe, it's Erik. I'll start and then maybe when it gets to some of the accounting, ask Curt to jump in as well. When it comes to seller financing, it's always been a preferred tool of ours. When we have the ability to talk to a land seller, and really add value over time to their property. We found that cost of capital to be lighter than most other sources. So historically, it's kind of gravitated in that 6% to 7% range. So that is a preferred methodology.

When it comes to land banking, yes, we did make mention of kind of the gross margin impact to the business. We do cost it in 2 different buckets, being capitalized interest and interest expense. And it does flow over time. So depending on what you have flowing through the portfolio, the timing of those communities, you're going to see a little bit of kind of picking the python as it moves through the financial statements.

Yes, Rafe, generally speaking, when a site is under development, we capitalize the interest into inventory. And then when those houses close, they get -- they come through on the closing on the margin front relative to that home. -- when a site is done with its development, we then treat that interest expense as a period cost, and it gets run through the P&L down in interest expense.

Great. That's really helpful. And then on the margin outlook side, I think you're assuming sort of stable construction costs, have you seen any impact from inflation related to the geopolitical backdrop yet? And what's the expectation there? Like we've seen some price letters and obviously, diesel costs are up, do you have contracts that like lock you near term? And what's the potential just the overall impact.

Yes. Great question, Rafe. What I would say, first and foremost, our costs quarter-over-quarter were down. So we're very proud of that. Our teams continue to do a lot of great work and working with our trade partners and our suppliers on trying to execute on our house cost reduction and mitigation strategies. Relative to what we're seeing relative to the Middle East conflict is today, nothing tangible has come through. To your point, there's been a lot of news out there relative to potential increases coming. But thus far, we have not seen any of those come through yet to us and hit us.

Now if they were to happen to come through based on what I articulated a second ago is that we continue to work on our house cost reduction strategies overall. And so if there is some impact, I think we can overcome a lot of that and offset a lot of it based on some of those strategies. And if there is some flow-through for this year, it's going to be mainly a Q4 event if it does impact us. But I'm pretty optimistic about our team's ability to continue to work on our strategies to minimize overall cost increases.

Your next question comes from the line of Jay McCanless with Citizens Bank.

So a couple of questions. And Sheryl, thank you for all the color around the design center events. I guess, could you maybe give us some context of how many of those you ran last year and what type of conversion improvement you saw versus last year? Or was this a new initiative that you all did this year to try and see what kind of to-be-build demand was out there?

No. We've been doing it design days for years. I would say we ramped it up pretty meaningfully. We've gotten better at it, and we really have focused it. It's not exclusively around to be built. But by giving folks the time with design experts in a very relaxed evening environment, we've just found it to be a remarkable tool. So I don't want to say it's double, but it's close to that.

Okay. And then the second question, you guys talked about mid-single-digit land inflation. I guess kind of a 2-part question. One, has the resurgence of to be built demand come faster than you all expected? And I guess, two, is there an opportunity to maybe rebalance some of your land portfolio to walk away, sell, however you want to term it, some of the more entry-level dirt to focus on more of the A and B locations that you have sitting in the land portfolio now and maybe help offset some of that land cost inflation with higher gross margins, et cetera?

It's a great question, Jay. And we continue to open up. If we look at community strategy. I think it really has set us up for a repositioning and a reacceleration into '27. When you look at the communities we opened in the first quarter and a number of what we've we have planned to open in the second and the back half, many of them are focused on the move up. Yes, we do have to continue to sell through on what I would call our first-time buyer position.

But when I look at some of the success in those openings, specifically, I mentioned Atlanta. Our team there opened 2 new move-up communities in the quarter, booking nearly 60 sales. Only 3 of those 6 specs. They did just a great job in presales a lot about what I talked about with the new -- the enhanced framework on our community openings, really making sure that we're doing a nice job in the presales. And it's just continuing to yield dividends for us.

Last quarter, I think I talked a great deal about, a new community that we opened in Phoenix with the success we had. In fact, that's a community that's mostly move up. And we're restricting sales in that community to ensure that we can align sales and construction cadence and have the ability to raise prices. So it's evolving through our investment committee approvals. But yes, you'll continue to see a greater pivot to the move-up and the Esplanade.

And Jay, that kind of inflationary number is kind of the historic perspective of what's running through the P&L. So to Sheryl's point, and you know that we've spent some time and energy kind of pairing the portfolio fourth quarter and first quarter as you see some of those walkaway costs. And so to your point, as we look forward, that in step with what's coming through the investment committee, I think last quarter, we mentioned about 85% of what came through in 2025, we would deem core and 100% in the first quarter. So that will continue to kind of evolve and get us back to where we want to be. .

Your next question comes from Ken Zener of Seaport Research.

Could you -- looking at order seasonality, which historically peaks in 1Q, then kind of moderates. Can you talk to the expectations given that orders and starts are going to kind of be reflective of each other? It sounds like in your commentary. And is that like driven by new communities?

Yes. We've talked about a fairly significant opening cadence. So I think to Curt's point, that will align well with starts. We talked a little bit about April and the momentum we're seeing there. So given the increase in communities and just the robust reception that we're seeing from the consumer, I think you'll continue to see a balanced view on specs and to-be-builts. But overall, I don't see much difference in our overall absorption levels as we continue to work our way through the second quarter.

So you say absorption, are you referring to the pace kind of holding the same?

Yes. I think pace generally holding the same and then obviously a ramp-up in communities. .

Your next question comes from Alan Ratner of Zelman & Associates.

So I appreciate all the color so far. I was hoping to dig in just real quickly on the pace and price kind of decision or strategy and really kind of trying to figure out the elasticity you're seeing in demand right now because when I look at your orders for the quarter, down 14% year-over-year, it seems like that was in line with your plan, given the fact that you reiterated the guide, but it does seem a little bit lighter than what we've seen from some of your competitors.

And I'm curious, as you kind of drill into the local market data, do you feel like you lost a little bit of share in the quarter? And was that at all a function of dialing back those incentives and maybe prioritizing the price and margin over pace in the quarter? Or am I perhaps thinking about that the wrong way? Just curious if you've done any analysis on that front.

Yes. No, I appreciate the question, Alan. Interestingly enough, and I understand that we missed consensus on orders. But when I look at our internal plan, we were actually spot on. So when we plan the year, guided to say 11,000 closings, our internal expectations on sales, pretty accurate. When I look at the pace market by market. As I said, we had a couple of markets that had larger misses. I pointed to Orlando with some of the repositioning. So with a reduction in community count a little bit in Denver. But across the rest of the business, I'd say exactly within expectations.

As far as dialing back incentives, we've always talked about, Alan, that certain communities are intended to operate at a higher pace and some were going to extract all the value out of. And I really believe that. We have too much confidence in the communities we build that we're just not going to come to some of the aggressive discounting that we've seen. We don't need to. We think we can create more value this way. So in total, a little lighter, I know than what the market expected, but actually in line with our expectations.

Got it. I appreciate that. And I guess I'll leave it there since the market is open. So I appreciate you squeezing me in. Thank you. .

Your next question comes from Paul Przybylski with Wolfe Research.

I guess, Sheryl, you mentioned that geopolitical events the rate increase tied to that has been a headwind to consumer confidence in the first quarter. In prior shocks like this, how long has it taken the consumer to rebound, if you will. Would you expect maybe the spring selling season extends into the second half of the year? Or is the consumer more apt to wait until '27 for more certainty?

No. I think we're already, it's an interesting question, Paul. And I'd say each market performing a little different on what the consumer is saying on the sales floor. I mean our web traffic is up considerably year-over-year, which I find a very encouraging sign. Foot traffic down a bit in most of our markets. But certain markets, I'll speak to Denver. It seems to be very, very tied to interest rate volatility. Other markets, I would say the macro just hasn't seemed to impact the way the consumers think in. So my instinct is, you're right, that we will see the spring selling season behave a little bit differently this year. It has been pretty consistent to what I'd say has been more historic norms if we know what normal looks like anymore and probably will go a little bit longer. Based on the level of activity that we're seeing and the engagement on the website and with our sales and online sales team members.

And maybe just one encouraging thing, Sheryl, as you think about generations, millennials specifically, 88% when they show up, they say they're definitely or seriously considering a home purchase. And so -- it's just one data point, but it is encouraging to see when they are engaged, that they are serious. And so you always imagine that all to your point, there are some things that pull people off the fence. Some of it will be some of the things you mentioned. And for others, it will be something else. But it's encouraging to see some of the folks that are showing up very engaged.

Well, and our conversions are at record highs. So the folks to your point here that are showing up have intent to buy.

And then you mentioned AI employment concerns. Is that still pretty much contained to IT sector? Or are you seeing that broaden out across your consumer segmentation.

Yes. You mean as far as any resistance because of concerns around jobs.

Yes. It's not something that our sales team hear a lot about. Certainly, there are some tech markets that may be a little bit. But I wouldn't say today that it's been a significant factor. When I look at the cancellations even though they're low, and I tried to get any trends there, Paul. There's some -- there's been some job concern, but it's actually a very small piece of the total cans.

There are no further questions at this time. We reached the end of the Q&A session. I will now turn back the call to Sheryl Palmer for closing remarks.

Well, thank you very much for joining us to discuss our first quarter. We wish everyone a good few months, and we'll look forward to seeking you at the end of Q2.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to Taylor Morrison's Fourth Quarter 2025 Earnings Webcast. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce Mackenzie Aron, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. 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. These statements 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 where applicable. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. I am pleased to share the results of our fourth quarter performance and look forward to sharing an update on our strategic priorities for 2026.

Our fourth quarter results met or exceeded our expectations across nearly all key operational metrics despite challenging market conditions. These results concluded a solid year of performance in 2025, during which we delivered nearly 13,000 homes at an adjusted home closings gross margin of 23% and generated 40 basis points of SG&A expense leverage on essentially flat home closings revenue.

Coupled with $381 million of share repurchases, these results drove a 13% return on equity and 14% growth in our book value per share. With the majority of homebuilders having already reported year-end results, it's clear that Taylor Morrison's 2025 performance stands apart. Among our peers, we delivered one of the highest home closings gross margin in the industry. We're the only to achieve year-over-year SG&A leverage and modestly increased our closings volume, while the industry was generally flat to down, which together drove more resilient bottom line earnings and returns.

In a year characterized by softer consumer confidence and heightened pricing competition and inventory levels, we believe that these results reflect the effectiveness of our diversified operating model and broad consumer reach across our national footprint of well-located communities. Given the market's persistent affordability constraints, which are felt most heavily among first-time homebuyers, our portfolio's unique concentration on move-up and resort lifestyle customers has helped us to navigate the market's headwinds.

We pride ourselves on developing thoughtfully designed communities, often with amenities in prime locations and offering a balanced mix of spec and to-be-built home offerings that meet the needs and aspirations of our customers. I believe this is perhaps Taylor Morrison's greatest competitive advantage, the desire to deeply understand our consumers, respond to their feedback and deliver a home buying experience that is second to none.

It is this unrelenting focus on our customers that has recently earned us the reputation as America's most trusted builder for the 11th consecutive year and to Fortune's Most Admired Companies list. I believe these strengths, our diversification, attractive product offerings and consumer-centric philosophy will be even more critical to our success as we move forward.

While there are reasons for optimism, industry-wide inventory levels remain elevated and consumers remain highly attuned to competitive dynamics in the marketplace and are closely weighing incentives, pricing and spec offerings in their purchase decisions. And while affordability has improved over the last year alongside lower interest rates, wage growth and price discovery, I believe consumer confidence in the broader economic and political outlook will be critical for further demand recovery.

That said, I'm cautiously encouraged by the sales success we achieved in the fourth quarter of 2025 and by the early momentum thus far in 2026. Our fourth quarter monthly absorptions outperformed typical seasonal patterns as our pace held steady from the third quarter, defying the average mid-single-digit sequential decline we have historically experienced. This is notable considering that we carefully manage pace and price community-by-community and in some cases, chose to be more patient as peers pushed through inventory into year-end and held incentives on new orders stable sequentially.

This momentum continued into January, even with the winter storm disruptions and early signs are positive as the spring selling season generally kicks off in full force this week. The fourth quarter strength was driven primarily by our premier Esplanade resort lifestyle communities, which experienced 7% year-over-year net order growth. This was followed by a low single-digit decline in move-up sales, while non-Esplanade resort lifestyle and entry-level orders were down in the mid- to high single digits.

On a mix basis, our orders by buyer group stayed relatively consistent quarter-over-quarter at 31% entry-level, 49% move-up and 20% resort lifestyle. From a market perspective, sales were strongest in our East and West areas with most of our Florida markets, California and Phoenix increasing year-over-year, while our Central region was slower due to softness across Texas, particularly in Austin.

As we look ahead, I expect 2026 to be another solid year for our organization, albeit one focused on setting the stage for a reacceleration of growth in 2027 and beyond. I'd like to walk through the moving pieces that are influencing our outlook for this year, while Curt will provide the specifics of our guidance in just a moment.

Given slower sales of to-be-built homes in 2025, we entered this year with a lower-than-normal backlog of just over 2,800 homes. As a result, this year's home closing deliveries and margins will be more dependent on sales during the spring selling season than is typical for our business. Positively, we expect to accelerate the number of new community openings in 2026 from 2025 with well over 100 new outlets planned, including over 20 new Esplanade outlets, which are already supported by deep interest lists. The majority of these outlets will open for sales in the first half of the year and begin contributing closings in the second half and into 2027.

In addition, the improvement in construction cycle times over the last 2 years has greatly enhanced our production flexibility with homes now able to start well into the third quarter and still close by year-end in many of our markets. Based on targeted consumer groups in the move-up and resort lifestyle segments, where personalization is valued, we expect new community openings to help shift our sales mix back to a more balanced mix of spec and to-be-built orders.

We are already seeing signs of this shift back to more historic preferences with to-be-built sales in January gaining 700 basis points of share versus the fourth quarter when we sold a record number of intra-quarter spec closings. Given the meaningfully higher average gross margin on to-be-built homes, we believe this mix shift will be an important driver of our long-term margin potential. However, in the near term, while we have reduced our spec home inventory by 24% since the second quarter of 2025, we still ended the year with nearly 3,000 unsold homes, including just over 1,200 finished homes.

We are focused on continuing to responsibly sell through this inventory while being highly selective in putting new specs into production. This inventory management is expected to temporarily impact our gross margins in the first half of the year.

Looking further out, we continue to target outsized growth over the next many years, including a continued aspiration to reach 20,000 closings, but we will not do so simply for growth's sake. Our capital allocation and strategic priorities are firmly rooted in generating attractive returns on our invested capital throughout housing cycles.

With competitive pricing pressures unlikely to meaningfully abate in the foreseeable future and housing fundamentals continuing to evolve, we are taking proactive steps to ensure our portfolio remains well positioned to perform regardless of the market backdrop.

For one, we are limiting incremental land investment in noncore submarkets that primarily cater to the most price-sensitive buyers. While these locations make up only a small portion of our overall portfolio, greater pricing pressure and a reliance on spec inventory in these areas has compressed margin opportunities versus comparable core markets. Over time, this shift will allow us to concentrate our efforts on serving more discerning entry-level demand where our offerings are more strategically aligned.

As Erik will discuss, we believe we are best able to meet the need for affordable single-family housing through our differentiated build-to-rent platform, Yardley, with a model that is both financially sustainable and supported by compelling demand tailwinds. We also expect to reinforce our focus on the first and second move-up segments, which have long represented the core of our company's expertise and customer base. These buyers value the choice, community development and prime locations that distinguish our offerings and often invest in lot and option selections that help sustain above-average margin and returns.

In 2025, these combined lot and option premiums represented nearly 19% of our base price. In addition, demographics in the move-up segment are highly supportive of future growth with outsized net population gains projected among 40- to 55-year-olds over the next decade behind only those aged 70 plus.

At the other end of the consumer spectrum, we will also continue to invest in the differentiated strength of our resort lifestyle brand, Esplanade. Unlike traditional active adult offerings, Esplanade communities deliver a lifestyle-first experience, complete with luxury amenities and concierge level services that extends well beyond the home itself. This unique value proposition drives superior home prices and gross margins that consistently exceed the balance of our business.

With a strong pipeline of Esplanade communities coming soon and opportunities for brand expansion in many of our markets, we expect this segment's contribution to our bottom line to grow meaningfully in the years ahead. And finally, we are doubling down on innovation across the organization. from the sales floor to purchasing, land due diligence, financial services and back-office functions, we have made significant strides in deploying our proprietary digital sales tools to reduce friction during the customer journey and AI-enabled processes to enhance efficiency and manage costs.

For example, we have developed a proprietary AI-powered platform that today houses digital tools and AI agents spanning purchasing, sales, customer service, financial services and employee resources. On the sales floor, our Customer 360 agent gives field leaders a comprehensive real-time view of our customers' journey from contract through warranty. In purchasing, AI-powered tools allow our teams to analyze purchase orders and query procurement data using natural language while also enabling our purchasing standardization initiatives. We will continue to scale these technologies to better serve our customers, streamline our operations and strengthen our competitive position. With that, let me now turn the call over to Erik.

Thanks, Sheryl, and good morning, everyone. At year-end, we owned or controlled 78,835 homebuilding lots, of which 54% were controlled off balance sheet. This compares to 86,153 lots at the end of 2024, of which 57% were controlled. The decline in our controlled ratio, which we expect to be temporary, reflects the impact of normal course takedowns in a few of our larger assets that were being seller financed as well as recent walkaways from controlled lot deals as we have reevaluated our pipeline against current market conditions.

Over the long term, we continue to target a controlled ratio of at least 65% as we seek to optimize our capital efficiency and manage portfolio risk. Based on trailing 12-month home closings, we owned 2.8 years of lots out of a total of 6.1 years of controlled supply at year-end. This was similar to 2.8 years owned and 6.6 years controlled at the end of 2024.

The majority of our lots remain in prime locations within core submarkets where we see the strongest long-term fundamentals. While we selectively invested in tertiary locations as work from home expanded, we have since shifted that limited portion of investment allocations back to core markets. Notably, 85% of our 2025 investment approvals were deemed to be in core locations based on consumer desirability.

Our recent consumer research reinforces this focus. Most of our buyers view their chosen community as core, and they consistently tell us that the overall community design is as or more important than the home itself. Furthermore, 80% of our buyers say that wellness is important to their purchase decision and even a higher percentage in our Esplanade communities where hundreds of residents hold wellness club memberships.

As a result, we believe our emphasis on prime locations, thoughtful community development and amenity offerings position us well, particularly as national new home supply remains elevated, especially at the entry level. In 2025, homebuilding land investment was approximately $2.2 billion, down slightly from $2.4 billion in 2024. This was below our prior full year target of approximately $2.3 billion, reflecting our cautiousness in approving new land deals and additional phases in the current market environment. With a healthy land pipeline already controlled, we expect to invest around $2 billion in 2026 with a renewed emphasis on opportunities in move-up and resort lifestyle positions, consistent with the strategic priorities discussed by Sheryl.

Before wrapping up, I'd like to now spend a moment discussing our build-to-rent business, Yardley. Yardley develops rental communities akin to horizontal apartments that blend a single-family living experience complete with private backyards and amenities with the affordability and flexibility of renting. Developed exclusively as rental homes, these communities provide a desirable and affordable solution for consumers looking for an alternative to traditional multifamily rental options.

Unlike traditional single-family rentals of scattered home sites, our Yardley communities are zoned and mapped as single tax parcels and transact like multifamily assets. As a result, and given what we have come to understand to date, we do not anticipate any impact from the administration's recent executive order aimed at the single-family rental market.

In the fourth quarter, we sold 1 Yardley community for approximately $55 million. At year-end, we had a total of 46 Yardley projects owned and controlled, representing approximately 10,400 homesites across 9 markets in Arizona, Texas, Florida and the Carolinas, representing one of the industry's largest build-to-rent pipelines.

Approximately 17 of these projects will be in profitable leasing operations this year, 7 of which are expected to reach targeted stabilization levels over the next 12 months. Once stabilized, we evaluate individual or packaged disposition strategies, dependent on market dynamics and purchaser and equity sentiment. Supported by our $3 billion land bank with Kennedy Lewis, we believe that we are well positioned to continue to efficiently and prudently scale this unique rental offering in the years ahead as less than 10% of Yardley's total units are fully on our balance sheet. Now I will turn the call to Curt.

Thanks, Erik, and good morning, everyone. I will review the details of our fourth quarter and full year 2025 financial performance. For the fourth quarter, reported net income was $174 million or $1.76 per diluted share, while our adjusted net income was $188 million or $1.91 per diluted share after excluding the impact of pre-acquisition abandonment charges and the loss on the extinguishment of debt related primarily to the redemption of our 2027 senior notes.

For the full year, reported net income was $783 million or $7.77 per diluted share, while adjusted net income was $830 million or $8.24 per diluted share.

In addition to the fourth quarter adjustments noted previously, full year earnings were also adjusted for real estate impairments, additional pre-acquisition abandonments and warranty charges incurred earlier in the year. Now to sales. Net orders in the fourth quarter totaled 2,499 homes, which was down 5% year-over-year. This decline was driven by moderation in our monthly absorption pace to 2.4 homes per community from 2.6 a year ago, partially offset by a 1% increase in our ending community count to 341 outlets. This was supported in part by improved cancellation trends. As a percentage of gross orders, cancellations were 12.5%, down from 15.4% in the prior quarter and 13.1% a year ago.

As Sheryl noted, we have well over 100 communities expected to open this year, including over 20 new outlets in Esplanade communities. These openings are expected to drive high single-digit outlet growth to 365 to 370 outlets by year-end. For the first quarter, we expect to end with around 360 communities.

Turning to closings. We delivered 3,285 homes in the fourth quarter at an average price of $596,000, generating home closings revenue of approximately $2 billion. Compared to our guidance, closings volume was at the high end of our expected range and the average price was slightly ahead of expectations. For the full year, we delivered 12,997 homes at an average price of $597,000, producing approximately $7.8 billion of home closings revenue.

Cycle time improvements continue to be a major driver of efficiency. During the quarter, we achieved about 1 week of sequential improvement, leaving us more than 5 weeks faster year-over-year and over 9 weeks faster than 2 years ago. These improvements enhance our ability to flex production and manage inventory, allowing us to start homes later for year-end closing dates.

In the fourth quarter, we started 2.1 homes per community, equating to 2,136 total starts. We ended the quarter with 5,682 homes under construction, including 2,956 specs, of which 1,232 were finished. Our total spec count was down 11% sequentially as our teams continued making progress in rightsizing our inventory positions by community with these focused sales efforts expected to continue through the first half of 2026.

Based on our backlog, sales expectations and cycle times, we currently expect to deliver around 11,000 homes this year, including around 2,200 homes in the first quarter. We expect the average closing price to be approximately $580,000 in the first quarter and between $580,000 to $590,000 for the full year. Turning to margins. Our home closings gross margin was 21.8%, slightly above our prior guidance of approximately 21.5%. This compares to 22.1% in the third quarter of 2025 and 24.8% in the fourth quarter of 2024, reflecting higher incentive levels and a greater mix of lower-margin spec home closings.

During the quarter, spec homes accounted for 72% of sales and 66% of closings, up from 61% and 54%, respectively, in the fourth quarter of 2024. For the full year, our home closings gross margin was 22.5% on a reported basis and 23% adjusted for inventory impairments and warranty charges. This compares to a reported margin of 24.4% and an adjusted margin of 24.5% for the full year 2024. In the first quarter, we expect our home closings gross margin, exclusive of any inventory-related charges to be approximately 20%, reflecting a higher share of spec homes as we prioritize the sale of existing inventory.

Beyond the first quarter, we expect gross margins to improve gradually throughout the year, driven primarily by an increase in the share of to-be-built home deliveries and a modest reduction in incentives as the year progresses. However, the ultimate level of incentives will be highly dependent on consumer demand during the spring selling season and interest rates. We expect construction costs to be relatively stable, while lot costs are expected to be up in the mid-single-digit range. As we gain greater visibility into the spring selling season, we will look to provide greater detail on our full year margin expectations.

We also maintained strong overhead discipline. Our SG&A ratio was 9.9% of home closings revenue in the fourth quarter and 9.5% for the full year, a 40 basis point improvement compared to 2024. This expense leverage was driven primarily by lower payroll-related costs, while ongoing strategic consolidation efforts and efficiencies created by our digital tools further improved our cost management.

For 2026, we expect our SG&A ratio to be in the mid-10% range. During the quarter, we incurred net interest expense of approximately $12 million, up from approximately $6 million a year ago due to an increase in land banking activity. In 2026, we expect net interest expense to increase modestly year-over-year. Financial Services posted another strong quarter with revenue of approximately $49 million. The team achieved an 88% capture rate, supported by competitive mortgage offerings and strategic alignment with our homebuilding operations.

Among buyers using our mortgage company, qualification metrics remained strong in the quarter with an average credit score of 750, down payment of 21% and household income above $183,000. In addition to the strong average credit profile, our customers and backlog were secured by average deposits of approximately $44,000 at quarter end.

Now on to our balance sheet. We ended the quarter with strong liquidity of approximately $1.8 billion. This included $850 million of unrestricted cash and $928 million of available capacity on our revolving credit facility. At quarter end, our net homebuilding debt to capitalization ratio was 17.8%, down from 20% a year ago. During the quarter, we repurchased 1.2 million shares of our common stock outstanding for $71 million. For the full year, we repurchased a total of 6.5 million shares, representing approximately 6% of our beginning diluted share count for approximately $381 million.

As seen in this morning's earnings release, our Board of Directors approved an increase and extension of our share repurchase authorization to $1 billion. This program expires on December 31, 2027 and replaces our prior authorization. We remain committed to disciplined and returns-driven capital allocation strategies, including the return of excess capital to our shareholders after investing in profitable growth opportunities and prudently managing our liabilities. In 2026, we expect to repurchase approximately $400 million of our common stock. Inclusive of this repurchase target, we expect our diluted shares outstanding to average approximately 95 million in the full year, including approximately $98 million in the first quarter. Now I will turn the call back over to Sheryl.

Thank you, Curt. To wrap up, I'd like to share a few closing thoughts on recent news headlines regarding the administration's focus on addressing the need for greater housing affordability and accessibility. As I shared last quarter, we have been encouraged by constructive dialogue with the administration and progress being made in Congress to advance housing legislation and are prepared to participate in meaningful policy solutions.

As you heard this morning, our focus on delivering the right product to our customers, whether that be homebuyers or renters is this organization's guiding mission. We believe we have the platform to greatly scale our business as market opportunities present themselves, and we will maintain our long-standing discipline around capital allocation and investment strategies to create long-term value for our customers, communities and shareholders.

Before I close, I want to express my sincere gratitude to our entire team for delivering a strong finish to 2025 and for the effort and dedication I know you will demonstrate as we move through 2026. Together, we will continue to push our company forward and achieve even greater success as we refocus and recommit to all that makes Taylor Morrison so unique.

Thank you to everyone who joined us today, and let's now open the call to your questions. Operator, please provide our participants with instructions.

[Operator Instructions] Your first question comes from the line of Matthew Bouley with Barclays.

Want to start around sort of the long-term view around the mix of the business, the buyer segments and geographies, some interesting commentary there around where you'll be leaning in and out of land investments in the future and sort of the favorable demographics for the move-up population going forward? So I guess the question is, number one, where do you see the entry-level mix going over time? And number two, just kind of anything around the specific geographies or submarkets to kind of help us understand where do you think you have the right scale, where you want to continue to lean into versus sort of where do you want to deemphasize?

Thanks so much, Matt. I appreciate the question. As far as the ultimate mix of entry level to the business, we've generally been running something like 1/3, 1/3 and 1/3, and I would expect that you'll see the first-time buyer come down a bit. But once again, it's not necessarily about departing from the first-time buyer business. It's refocusing the business geographically where we don't buy land in what I would call those more fringe or tertiary locations that attract a very different entry-level buyer.

And as we see movements in the markets, I think we've been -- we've proven, we've seen over the years. And we thought maybe it could be a little bit different during COVID that those more tertiary locations might provide a different experience coming out of COVID. But the honest truth is it's just not the case that the further out you get when markets slow down a bit, we see those come to a very different stop and the level of incentives required to get those first-time buyers into a house -- it's tough.

So it's not necessarily about once again, leaving -- you've heard us over the years talk about the professional first-time buyer, Matt, where that's generally a dual income. I mean more than 50% of our business today is millennials, and we're seeing more than half, if I'm not mistaken, Erik, of those millennials already buying their second house. So it's really a subset of the first time.

As far as geographic penetrations, I think we've talked over the last few quarters that we've pulled back some investment in California a bit, recognizing some of the underwriting constraints that we've seen there. So I think you'll see that geographic shift mix. But beyond that, I would think you'll continue to see us invest across our markets.

When I look at the business, Florida continues to be -- we continue to be very bullish on it, and it continues to be the home of our Esplanade brand. So I think you'll see continued penetration in Florida, Texas, different -- slight difference in California. Phoenix, very steady for us, Colorado. So I don't think you'll see huge shifts in the geography.

Okay. No, that's perfect, really detailed. Second one, spec versus to-be-built mix. I think I heard you say 72% spec sales in Q4 and that you've sort of mixed somewhat back towards to-be-built year-to-date, if I heard you correctly. So is the intention to get back to 50-50? And can that happen in 2026? Or sort of what's the time line and intention around that mix?

It's a great question. Hard for me to be 100% certain of where that mix lands. What I'm excited about is we are seeing the consumer show up differently, Matt. I mean last year, it's not like we ever changed our strategy, and we wanted to sell less to-be-built. But what we definitely saw is the consumer -- our industry trained them. And the honest truth is that the incentives were stronger. with an inventory home and the closer that home got to completion, the stronger the incentives. And the buyer really began to appreciate the impact of that.

What we've seen since the first of the year is they're showing up with more of a desire to buy what they want, where they want it, how they want it. They want to appoint the house in a way lot premiums have become quite important again. And so yes, we've seen 700 basis points in January over the average of to-be-built in the fourth quarter. We have seen that continue in February. So I'm very encouraged about that. I'm not sure we were ever 50-50. We were probably 60-40-ish, Curt. And it's kind of moved on the margin 5 percentage points. 50-50 would be ideal. And maybe over time, Matt, as we continue to evolve the portfolio further away from the more attainable buyer, we might see that. I would be pleased, but surprised if we saw a 50-50 mix in 2026. Do you agree?

No, I agree. And I think, Matt, over the course of the year, we're going to work our way through that. That's something that's not going to happen overnight, just kind of where we've made great progress with our spec inventory. I think as Sheryl -- but we still have a little bit higher number of finished inventory than maybe we would like. So we'll continue to work our way through that and balance that with bringing in some of these to-be-built sales, especially on some of the new outlets that we'll be opening over the course of the year.

I hope that helps, Matt?

Your next question comes from the line of Alan Ratner with Zelman.

First question, similarly on the mix of the business, I just want to make sure I'm thinking about kind of Esplanade the right way in terms of -- it sounds like a lot of the community growth or at least the share coming from Esplanade is going to continue to rise. I know you showed that off at your Analyst Day last year. When we look at absorptions kind of where they were running at in '25 and where you see that in '26 and beyond, should we think of any mix shift there, either higher or lower as more of the business comes from Esplanade? I think generally, those are higher absorption communities, but I just wanted to confirm that.

I'd say actually, Alan, I think they're actually quite consistent with the rest of the business. We might have a couple of positions within -- I mean, as you know, we probably have 4 or 5 communities per Esplanade. So we might have some that run in the low 3, some that run in a high 2. But I think on average, they're pretty consistent. Just for clarity, as we've talked about those 20 new outlets, that's probably 4, 5 new communities.

But I wouldn't see any significant change in the pace. We'll continue to aspire as we see some market bend to get back to that annualized pace of a low 3. But as I've said in the prepared remarks, it's just not our intention to just throw inventory in the ground and sell at all cost, given, I think, the value creation that we have with our land holdings.

Makes sense. Second question on the cost side. I know you mentioned that your outlook is for pretty flattish construction costs this year. And certainly, I think cost has been a nice tailwind in general for builders over the last year or so. We're starting to see lumber prices tick back up again. There's a little bit of increased chatter about maybe some cost increase announcements around the new year, which I think is fairly normal for this time of year, but you have the headlines around ICE raid still out there. So I'm just curious, is there any risk to that outlook based on what you're seeing here in the first 6 weeks or so of the year? And generally speaking, where do you see cost trending beyond?

Alan, great question. Just kind of a little backdrop on the cost side. We saw tremendous -- teams did a lot of work in 2025 on our house cost initiatives, very proud of what we were able to accomplish. And to your point, lumber up here more recently is starting to run up a little bit. But our teams continue to focus on house cost reduction strategies, working with our trade partners, working with our suppliers.

And so we think we have the ability to hope to offset some of those potential headwinds that are out there through just our continued work on optimizing the business, whether it's through our discussion with our trade partners, our suppliers or just our continued work on optimizing our floor plans, value engineering, our new communities, all those different type of tactical things. So it's something that we're looking at and watching and something the teams are very focused on.

Your next question comes from the line of Trevor Allinson with Wolfe Research.

Actually, you've got Paul Przybylski on. I apologize if I missed this. Could you bridge the sequential gross margin decline for 1Q among leverage incentives, land inflation mix, et cetera. And I think you said the incentive environment was stable in 4Q. If that remains the case in 1Q, should we expect a gross margin in 2Q similar to 1Q?

Great question, Paul. Yes, we're not going to probably talk further beyond Q1 today. I think in our prepared comments, we did talk about a gradual increase in margins over the course of the year just because of the change in mix to a higher concentration of to-be-built homes. And of course, as we work our way through our existing inventory. From Q4 to Q1, sequentially, the margins are down, I think, 180 basis points, and that is in large part from a mix standpoint. A, we pulled in some higher ASP and higher-margin homes in '25 into Q4. And as a result, now we have a few more of those entry-level kind of tertiary kind of community closings coming through Q1.

And so as we work our way through that, we'll see our margins in line with that guide that we put out there. So -- and relative to incentives, as Sheryl alluded to in our talking points, they were modestly in line from an order perspective, but they were kind of -- at the end of the day, they stay -- they're remaining elevated, so to speak, from Q4 into Q1 from a closing perspective.

And maybe, Curt, the only other thing I might add is, obviously, Paul, we're going to take price as the market allows. I was interested that in the fourth quarter, we did see base prices increase in more than half of the communities that have been opened in the prior year and more than 1/4 of our total communities. And so if the opportunity exists, we're going to continue to take base price increases, reduce incentives, which is where we're getting the confidence to say we expect Q1 to be the low point of the margin.

Okay. And then I guess you talked a lot about the 100 new community openings this year. How have absorptions been performing in your new communities relative to legacy? Are they still seeing a historical spread?

Historical spread. I mean I'm excited about the new communities we're opening. I can give you a couple of examples. I might have mentioned in prior quarters that we were opening a new community in Phoenix. It's over 1,200 lots. I think we have 5 positions. We opened it in the fourth, some of it at the end of September, 1 or 2 -- 1 position in October. We've got well over 100 units sold in there already.

So I would say pace is there really, really strong, one that's been -- it's a beautiful master plan called Verdin. When I look at some of our Esplanade preopening activities and what we call our signature VIP events, I mean, some of these communities have waiting lists or interest list, not waiting, we haven't started sales, interest list of hundreds to thousands of names. So there is this activity that we're seeing. We're also seeing traffic generally has picked up in the first of the year. When I look at web traffic year-over-year, up in most all of our divisions.

So both new and old, I think we are starting to see a little traction. And it's early days, like I said, generally, we see spring kick off after Super Bowl. So here we are. So if we can continue that, then I think that gives us some upside to the year.

Your next question comes from the line of Michael Dahl with RBC Capital Markets.

Sheryl, just to pick up on the last comment around kind of the seasonal improvement and similarly, your opening comments about the improvement. Obviously, like it hasn't been a very normal period of time the past number of months. So can you just help us dial that in a little bit more? Like obviously, seasonally, you should see traffic pick up 4Q better than normal seasonal sequential change in orders, but off worse than normal.

So what are we actually talking about in terms of quantifying kind of the pace dynamics that you've seen over the past couple of months or January into Feb more specifically?

Yes. No, it's a fair question. And you don't -- I don't want to get too over my ski tips, Mike. But what I would tell you is the improvement we saw through the fourth quarter, December being better than November, that would be something relatively unusual in my tenure. January better than December. Okay. We should expect that. And the good news is we got it. And like you said, given the volatility that we've seen over the last year, I take each of these as positive green shoots.

I'd say it's a little -- and honestly, and I think we said it in our prepared remarks, what made January even more -- I don't want to -- probably a better word than sensational, but strong was the fact that we had a real significant weather event and a large part of the country, we were closed in many of our communities for days in Texas and the Southeast, and we still saw a nice January finish. And I give a lot of credit to our virtual tools on the ability to be able to continue to work with these consumers even when they couldn't come into the sales office.

February, we're 10 days in, a little early. I would say generally similar. I'm not going to -- it's hard to make a trend in 10 days. We've got some communities that are doing really well and ahead of pace and some that aren't quite there yet. We had a strong finish. We've also had weather into early February. So all in all, I'd say it's generally supportive of kind of normal seasonal trends. To your point, we haven't seen in some time. So it's nice to see that momentum building.

Okay. And maybe just one quick one on that, just to put an even finer point on that. Are we talking absorptions now flat year-on-year, up year-on-year, so down a little year-on-year. So then my second question is really then on the -- I want to make sure I understand the incentive comments, appreciating you're not guiding beyond 1Q. When you consider conceptually 1Q to be the low and incentives improving, are you really just saying incentives should improve as a function of your build-to-order mix? Or do you also expect just from a market level incentives to improve through the year?

Well, obviously, if we get continued traction and continued pickup in market, like I said, we'll continue to take price when we can with incentives. We've also seen some relief from interest rates. I mean, still somewhat volatile. I think we're probably in the 6.1% range over the last few days. Sometime last year, that was closer to mid- to high 6s. So I think you've got a number of things working. And I think once again, we have the programs, Mike, to help the customer and not spread those incentives like peanut butter. The to-be-built mix will certainly be a piece of it as well, but I wouldn't just point to that. I think there's a number of factors that would help us.

Now having said that, competitive pressure and seeing what others offer is going to continue to also have an impact on the incentives the consumer continues to expect. But all in all, I'm hoping there's some discipline across the market, and we see a pullback in incentives and have the ability to take price.

Pace, I don't know that I've seen -- I've looked at Curt year-over-year. I mean, I think we had a strong first quarter last year. So my instinct it's probably a little down year-over-year, Mike, but I need to verify that. But just going into the Investor Day last year, we had a really nice strong first quarter. But offsetting that, you're going to see some good community count growth, as you saw us going from low 340 to something closer to 360 in the first quarter.

Your next question comes from the line of Michael Rehaut with JPMorgan.

First, I just wanted to make sure I heard it correctly and sorry if this is being a little repetitive, but just wanted to appreciate the trend of incentives that you guys have offered in from the beginning of the fourth quarter to the end of the fourth quarter. I think you said it was relatively consistent, but I just want to make sure I heard that right. And also, when you think about the first quarter gross margin guidance, how much of that is reflective of just higher incentives flowing through more broadly versus mix and maybe flushing out some of the impact of selling some of the excess spec that you have in inventory?

I'll let Curt get into the particulars. But Mike, I really -- as Curt said in his prepared remarks, I mean, we have a lot of inventory that we want to -- even though we're going to continue to get those to-be-built to hopefully a different customer, we need to work through that inventory in the first quarter. So we are expecting some pressure there.

And if you look at just the ASP that we articulated for the first quarter and how hard slightly lower than what we saw in the fourth quarter. I think it speaks to the mix. And as we've said, the more affordable positions require greater incentives. So we're anxious to work through those and then see the to-be-built be a healthier piece of the mix.

Yes. And then, Mike, on the incentives, in our prepared comments, you did hear it correctly, they were relatively flat sequentially from Q3 to Q4. As we kind of -- I think we alluded to that last quarter that we're going to -- that we would have elevated incentives to move through based on that spec penetration for Q4 closings as we work through the inventory.

Your next question comes from Rafe Jadrosich with Bank of America.

Just for following up on the comment on incremental land investment in the noncore submarkets sort of shifting away from that. Obviously, it makes sense given the context of what's going in the market at the entry level today. When you think about -- are you finding better land deals at the move-up and resort lifestyle sort of price points? Is there just less competition in those markets? Are you just more bullish on the long-term fundamentals on move-up resort lifestyle versus entry level? Can you just talk a little bit more about the shift there and why the returns will be higher at move-up than compared to entry level?

Rafe, it is Erik. Yes, good question. It's really kind of a light pivot to where we've come from, right? If we were to look historically, we've really been at that 15% kind of exposure to kind of that tertiary entry level. And coming out of COVID, as Sheryl suggested, we saw such strong demand there and really we're discerning how much of that work from home was going to be kind of sustainable. And so it moved up to 20% to 25%, call it. And so it's really a re-pivot back to 15%.

Direct to your question, I would say, yes, when you think about the competitive landscape and some of the peer group that's very focused on that entry level, I would suggest that the land market has yielded some opportunity for us, especially as the market has evolved. So I would say, yes, it's what we're good at. It's what we've been historically focused on from an opportunity standpoint, that's where we're seeing some of the opportunity, and I would expect some good performance looking forward.

And the only thing I'd throw on top of that, right, is when we're talking about the first-time buyer environment today, with every sale, it's really working through with them, can they make this work. When you look at the move-up and the Esplanade buyer, it's really should I, given just the confidence things we've talked about. They have the capabilities, they have the balance sheet. They just want to make sure that the time, it makes sense for them and they have the time -- it's the right time to do it. It's a very different formula when you're dealing with this first-time buyer and how many consumers we have to preapprove to try to get folks that actually can make the final purchase. And we don't see that, that is going to significantly change in the foreseeable future.

Okay. That's helpful and that makes sense. And then just following up on the land side, mid-single-digit lot inflation for '26. For the land that you're contracting today, what's the inflation that you're seeing? And is there a point here where we'd expect some relief like to roll over in '27? How do we think about that through the year?

Yes. As far as the land conditions out there, as you know, when we expressed in fourth quarter, we really focused on pairing to really the core opportunities, the cream of the crop for us, and I think others have done that, too. And so you are seeing kind of a stabilization in the land market that's resulting in something that approximate 0, so kind of low, low single digits in terms of land appreciation expectations in the market today. So we are seeing -- and as we expressed in third quarter, too, we've experienced a lot of success in working with sellers and renegotiating pretty much everything that comes through the investment committee.

Your next question comes from the line of Kenneth Zener with Seaport.

Could you comment on the -- I know Central and you mentioned Austin, but could you talk about what the dynamics were that saw the order rates for that whole segment come down first? And then second, are you guys going to try to -- it sounds like you're probably going to run starts in line with orders? Or is there going to be more of a front-end load this year? That's it.

Yes. Maybe I'll take the first one, and then Curt can grab the second. When I think about Texas, it has been a little bit more of a mixed bag, Ken. Austin has probably seen the greatest pullback of volume. But honestly, our locations are, I believe, best in market. And so we continue to see a strong margin. So we've been okay holding the line a bit there and not giving away quality irreplaceable communities.

The good news in Austin is we have seen spec inventory drop in more than half over the last year. Land activity continues to be tough, but the teams are being very diligent and making sure we don't get ahead of ourselves. Houston and Dallas slowed down year-over-year, but not what we saw in Austin. We did see paces hold serve in Dallas and Houston paces are ahead of the company average. So like I said, a little bit of a couple of different stories. Similar to Austin, though, margins have held up well in all of Texas.

So I think Texas provides the perfect example of the important trade-offs we'll make between price and pace, but we'll take a lower volume to protect the margin. As I look forward. Texas is an important part of the portfolio. I expect the state of Texas to be the highest population growth over the next 3 to 4 years.

And then on the starts front, Ken, the last couple of quarters, we've, I guess, understarted relative to sales as we've kind of worked our way through our inventory. But on a go-forward basis, I envision us being more sticky to the sales standpoint from a start standpoint on a go-forward basis. So that's what kind of we're looking at as we're sitting here today.

Your next question comes from the line of Alex Barron with Housing Research Center, LLC.

I think you just answered one of my questions. The other one was, I think there was more price discounting activity from yourselves and other builders in the fourth quarter. But do you feel like that's mainly a 2025 thing and that the type of incentives that are now in 2026 has gone back to primarily rate buydowns and that type of thing, closing costs?

Yes. I think that will continue to be part of the mix, Alex, as we've said, we continue to personalize our incentives by consumer. When you're dealing with the resort lifestyle, honestly, for them, it's not as much about mortgage buydowns as it is maybe credit in the design center as they customize their home.

I think the competitive market will help guide us there. But once again, I think we're going to try to hold the line. Certainly, we have some quality assets in large master plans where we're going to be very careful about the inventory we leak in to make sure that we can protect the values.

How are you guys thinking in terms of specs per community or spec starts? I know there's different price points that you guys are working with, but maybe like especially at the entry level, how are you guys thinking about what's the ideal number of specs for your strategy?

Yes, Alex, we have what I would call a spec management kind of program that we kind of follow. It's a subdivision-by-subdivision or community-by-community kind of basis analysis. In entry-level communities or multifamily communities, we'll tend to have maybe a little bit higher spec counts in those communities. And then as we work our way up the consumer segmentation kind of profile to the move-up in resort lifestyles, we'll have less specs that we'll have in the program. But at the end of the day, it all comes down to it's a community-by-community analysis and what the demand shift is. And so we're looking at those all on an individual basis.

There are no further questions at this time. I will now turn the call back to Sheryl Palmer, CEO and Chairman, for closing remarks. Please go ahead.

Well, thank you very much for joining us today where we have the opportunity to share our 2025 results, and we look forward to talking to you at the end of the first quarter. Take care.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, and welcome to Taylor Morrison's Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to introduce Mackenzie Aron, your host, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning. 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. These statements 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, Sheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Eric Heuser, our Chief Corporate Operations Officer.

We are pleased to report strong third quarter results despite the continuation of challenging market conditions. Driven by our diversified portfolio and our team's careful calibration of pricing and pace across our well-located communities, we once again met or exceeded our guidance on all key metrics including home closings volume, price and gross margin. The ongoing execution of our balanced operating strategy has allowed us to maintain healthy performance even as we have adjusted pricing and incentives, particularly in entry-level price points, combined with a thoughtful approach to land-lighter financing tools, and effective cost management, our business is generating strong bottom line earnings, cash flow and returns for our shareholders. With approximately 70% of our portfolio serving move-up and resort lifestyle homebuyers, our financial performance is supported by the strength of our broad consumer set. However, even though these generally well-qualified buyer groups are less sensitive to affordability constraints, all consumer segments have been impacted by macroeconomic and political uncertainty which has weighed on buyer urgency and shopper sentiment. In addition, consumers are aware of the current competitive dynamics in marketplace and are carefully weighing available incentives pricing and pack offerings in their purchase decisions. Appreciating these dynamics, we are focused on deploying innovative and compelling incentives and pricing offers to support buyer confidence and improve affordability, leaning into the appeal of our well-designed spec and to-be-built home offerings to meet consumer preferences and carefully managing new starts as we continue to rightsize inventory and prepare for next year's spring selling season.

Given our quality land locations, the majority of which are in prime core submarkets, our sales strategies are drive community by community based on their unique selling proposition competitive analysis and consumer profile. In all communities, we strive to price to market to remain competitive and offer our homebuyers the greatest value. In some communities, this results in a price-focused approach to drive volume, especially where we serve predominantly first-time buyers, and differentiation is more challenging given market competitive pressures. However, in move-up and resort lifestyle communities, we are inclined to be more patient to protect values given our distinct locations and product offerings in hard to replace communities. We are able to execute this balanced approach in part because we have a well-structured land bank that provides a flexible and capital-efficient lot supply. As I said last quarter, while the near-term outlook calls for a more patient trajectory, we strongly believe that we have the platform to jump start outsized growth as market dynamics stabilize. In the meantime, we are doubling down on opportunities for cost management with our suppliers, value engineering with our product offerings and overhead efficiencies in our back office. These efforts help drive year-over-year improvement in our direct construction cost and 80 basis points of SG&A leverage.

We are also continuing to expand our industry-leading tech-enabled sales tools, which are contributing to growing cost efficiencies as well as an improved customer experience. I'm pleased to share that we recently launched an industry-first AI-powered digital assistant across select markets on taylormorrison.com. Unlike traditional chatbot seen in our industry that rely on scripted responses forcing home shoppers through a predetermined path, our new digital assistant leverages generative AI to provide dynamic data-driven guidance that better mirrors an in-person sales interaction. Our digital assistant guides consumers through their discovery journey provide them detailed answers to each shopper's unique questions and help convert interest into action, supporting lead generation and customer acquisition. This technology marks a meaningful advancement in how we engage prospective buyers online, and it's another step in our ongoing digital innovation strategy as today's consumers increasingly seek intuitive, personalized shopping experiences. As to recent demand trends, we were encouraged to see monthly net absorption paces improved each month during the quarter with September pacing at the strongest level since May. In contrast to typical seasonal slowing into the end of the summer as the improvement in mortgage interest rates helps for activity.

In total, our monthly absorption pace was 2.4 per community for the quarter and had averaged 2.7% year-to-date, slightly below our long-term target as demand has remained somewhat choppy. However, there are positive signs that potential buyers are cautiously engaged in the market. For one, our latest national home-buying webinar, a free educational opportunity, we offer home shoppers to equip them with the knowledge needed for a successful home-buying journey attracted over 400 attendees. That's a 155% increase from our last webinar. In addition, total website traffic is at double digits and mortgage prequalification volume is trending similarly to year-ago levels.

I continue to believe that for our generally well-qualified, diverse customer base, improve confidence in the broader economic and political outlook will be the most important determinant of demand stabilization, especially for discretionary home purchase decisions in our move-up and resort lifestyle communities. Among the many headlines impacting confidence uncertainty related to H1B policy and broader immigration-related changes have weighed on nonresident buyer activity with Dallas, Austin, Atlanta and the Bay Area feeling the greatest impact.

From a consumer standpoint, the mix of our orders by buyer group stayed relatively consistent sequentially in the third quarter at 30% entry level, 51% move-up and 19% resort lifestyle. On a year-over-year basis, our first and second move-up sales held in most strongly while our entry-level segment pulled back as did our resort lifestyle segment due to performance in our non-Esplanade communities. Going a step further, specific to our premier Esplanade segment, which accounts for just over 10% of our portfolio orders, were flattish year-over-year, benefiting from a handful of new community openings. Given the brand's affluent customer base, this segment of our portfolio is relatively insulated from interest rate concerns and instead more reliant on consumer confidence. Positively, we did see improved shopper engagement in Esplanade during the quarter with many consumers exploring multiple communities across markets with a willingness to travel to find the preferred combination of lifestyle, location and price. With a healthy pipeline of new Esplanade communities scheduled to open in 2026, we remain encouraged by the strength of this consumer group and the opportunity to capitalize on this brand's unique lifestyle offerings in the years ahead.

As we look ahead to 2026, it's still too early to provide guidance, but there are a few strategic priorities I would emphasize as we contemplate next year's opportunities against ongoing uncertainties.

To begin, we have well over 100 communities expected to open next year, resulting in mid- to high single-digit anticipated outlet growth. Many of these communities are slated to open in time for spring selling season, which should help support our sales pace and delivery goals next year. We also have realized significant cycle time savings, as Curt will detail, providing improved flexibility to start and close homes within the year including build-to-order homes. While we hope to begin gradually shifting our deliveries closer to a more balanced mix of to-be-built and spec homes over time from our current mix of roughly 70% stack and 30% to-be-built sales, this normalization will take time and be dependent on customer demand.

For now, specs will continue to bridge the gap between current buyer preferences for incentivized quick move in inventory and an eventual return to more historic preferences for personalizing to-be-built homes, especially in our move-up and resort lifestyle communities, which have long been heavily weighted to to-be-built sales. Recognizing this unique environment, we are fortunate to have experienced teams across our divisions with the expertise to respond to local market conditions, effectively to best serve our home buyers.

With that, let me now turn the call over to Eric.

Thanks, Sheryl, and good morning.

At quarter end, we owned or controlled 84,564 homebuilding lots. Of these, just under 12,000 lots were finished. The balance are being and will be value enhanced by normal course entitlement and development efforts over time. Based on trailing 12-month closings, this represented 6.4 years of total supply, of which 2.6 years was owned. The majority of our lots are in prime locations and core submarkets where we believe long-term fundamentals are healthiest. This core location strategy has helped to partially insulate us from the elevated level of new and existing home inventory in some markets. We control 60% of our lot supply via options and off-balance sheet structures. This is up from 57% at the end of 2024 and is considerably higher than the year-end low watermark of 23% in 2019 as we have made significant progress in our asset lighter strategy.

Importantly, we have done so by prioritizing self-financing, joint ventures and other option takedown structures, complemented by land banking at rates not historically seen. By utilizing each of these vehicles, we look to optimize the trade-off between gross margin and expected returns. As we continue to strategically deploy these tools, we believe we are well on our way of achieving our goal of controlling at least 65% of our lots.

With respect to the land market, we have seen some development cost relief and favorable adjustment in land sellers' expectations regarding land structures and values. This has translated into an increased receptiveness on the part of land sellers to structure deals with terms, our preferred financing route or in a growing share of deals to also adjust pricing.

In the third quarter, our investment committee reviewed land acquisition updates that contemplated favorable transaction enhancements impacting nearly 3,400 lots and more than $500 million of purchase price. These enhancements resulted in an 8% average price reduction, 6-month average closing deferral and other structural improvements. These negotiations related to current deal flow as well as deals that were originally approved as far back as the fourth quarter of 2023. Partially as a result, we have invested $1.6 billion in homebuilding land year-to-date as compared to $1.8 billion at this time last year. We regularly review and evaluate our deal pipeline to test underwriting assumptions and ensure each new deal and additional phase meet our thresholds prior to closing.

With the flexibility to be patient given our existing lot supply, we now expect to invest approximately $2.3 billion this year, down from our prior expectation of approximately $2.4 billion and our initial projection of $2.6 billion coming into the year. Especially in volatile markets, our investment discipline is critically important to ensuring our portfolio is set up to perform for the long term.

Turning to our build-to-rent platform. We previously announced that we had entered into a $3 billion financing facility with Kennedy Lewis to support our Yardley business. which, as a reminder, provides an attractive and affordable single-family living experience and [ amenitize ] rental communities. During the third quarter, we transferred 14 of our 22 non-JV projects from our balance sheet into the vehicle, providing capital relief of approximately $140 million. We expect to complete the transfer of a handful of additional projects by year-end, which would release another approximately $50 million. In total, these transfers address over $1 billion of funded project costs. Even more meaningfully on a go-forward basis, the structure allows us to jointly underwrite new Yardley opportunities, which can then be acquired, developed and constructed fully off balance sheet within the vehicle, providing significant capital efficiency and optionality as we continue to scale this unique business and optimize disposition strategies. Consistent with this optionality we now expect to sell 2 projects by year-end as we have taken a more agent approach given recent market conditions.

Now I will turn the call to Curt.

Thanks, Eric, and good morning, everyone.

Turning to the details of our financial results for the third quarter. We reported net income of $201 million or $2.01 per diluted share. This included inventory impairments pre-acquisition abandonments and warranty adjustments. Excluding these items, our adjusted net income was $211 million or $2.11 per diluted share.

During the quarter, we delivered 3,324 homes, which slightly exceeded the high end of our guidance range of 3,200 to 3,300 homes due to faster cycle times. The average closing price of these homes was $602,000, also slightly ahead of our guidance of approximately $600,000 due to a favorable mix. In total, this generated home closings revenue of $2 billion. We are closely managing our starts volume based on community-specific inventory levels and incremental sales.

During the quarter, we started 1.9 homes per community, equating to 1,963 total starts. We ended the quarter with 6,831 homes under construction including 3,313 specs, of which 1,221 were finished. Our total spec count was down approximately 15% from the second quarter. As we look ahead to 2026, we will be strategic in putting new spec starts into production in advance of the spring selling season. Appreciating that our current spec inventory remains elevated and the demand environment is fluid. Positively, the ongoing improvement in cycle time has significantly strengthened our ability to flex production levels.

In the third quarter, we realized another roughly 10 days of sequential savings, leaving us about 30 days faster than a year ago in 90 days faster than 2 years ago. Even still, we believe there is further room for improvement as we are continuing to find opportunities for additional efficiencies throughout the construction schedule aided by the slowdown in industry-wide starts. Based on our current inventory position, we expect to deliver between 3,100 to 3,300 homes in the fourth quarter. This implies an updated full year home delivery target of 12,800 and to 13,000 homes, reflecting our current backlog and recent sales paces. We expect the average closing price of our fourth quarter deliveries to be approximately $590,000, which would leave our full year closing price at the low end of our prior range of $595,000.

Our reported home closing gross margin was 22.1%, while our adjusted home closing gross margin, which excludes inventory impairment and certain warranty charges, was 22.4%. This was slightly ahead of guidance of approximately [ 22%. ] The upside was due in part to a favorable mix of higher-margin to-be-built home closings, which benefited from baster cycle times. Conversely, for the fourth quarter, we expect a modest mix headwind from a higher penetration of spec home plussing with spec homes accounting for 72% of third quarter sales, with 61% of closings we expect our spec closing penetration to increase in the near term.

As a result, we expect our home closings gross margin, excluding any charges to be approximately 21.5% in the fourth quarter. This would imply a full year home closing gross margin of approximately 22.5% on a reported basis, and roughly 23% on an adjusted basis, consistent with our prior expectations.

Now to sales. Net orders in the third quarter totaled 2,468 homes, which was down just under 13% year-over-year. This was driven by moderation in our monthly absorption pace to 2.4 homes per community from 2.8 a year ago, partially offset by a 3% increase in our ending community count to 349 outlets. Cancellations equaled 10.1% of our beginning backlog and 15.4% of gross orders. While cancellation activity has increased due to change in consumer sentiment, we believe our cancellation rates remain below industry averages, driven by our emphasis on prequalifications average customer deposits and the overall financial strength of our buyers.

Looking ahead, we now expect our outlet count to be approximately 345 at year-end, slightly below our prior guidance as we have intentionally delayed some openings into the new year when anticipated selling conditions are stronger. As Sheryl said, we have well over 100 communities expected to open next year, resulting in mid- to high single-digit anticipated outlet growth in 2026.

We once again realized strong expense leverage as our SG&A ratio improved 80 basis points year-over-year to 9% of home closings revenue. This improvement was driven primarily by lower payroll-related costs and commission expense. For the year, we continue to expect our SG&A ratio to be in the mid-9% range. Our financial services team maintained a strong capture rate of 88% during the quarter, which drove financial services revenue of $56 million with a gross margin of 52.5%. This was up from $50 million and 45%, respectively, a year ago. Among buyers using Taylor Morrison Home Funding, credit metrics remained healthy and consistent with recent trends with an average credit score of 750, down payment of 22% and household income of $179,000.

Before turning to our balance sheet, I wanted to highlight that during the quarter, we incurred net interest expense of $13 million, up from $3 million a year ago, driven primarily by our land banking vehicles. We expect to incur a similar amount of net interest expense in the fourth quarter.

Now on to our balance sheet. We ended the quarter with strong liquidity of approximately $1.3 billion. This included $371 million of unrestricted cash and $955 million of available capacity on our revolving credit facility. At quarter end, our net homebuilding debt to capitalization ratio was 21.3%, down from 22.5% a year ago. During the quarter, we repurchased 1.3 million shares of our common stock outstanding $75 million. Year-to-date, we have repurchased a total of 5.3 million shares for approximately $310 million, representing approximately 5% of our outstanding share count at the beginning of the year. As a result, we are well on track to achieve our full year repurchase target of at least $350 million as we remain focused on returning excess capital to shareholders and taking advantage of the attractive valuation of our equity. At quarter end, our remaining repurchase authorization was $600 million. Inclusive of our repurchase target, we expect our diluted shares outstanding to average approximately $101 million for the full year, including approximately $99 million in the fourth quarter.

Now I will turn the call back over to Sheryl.

Thank you, Curt.

I'd like to end by acknowledging the administration's recent focus on addressing the country's critical need to help make housing more affordable. At Taylor Morrison, we welcome the opportunity to work collaboratively towards expanding homeownership and improving accessibility. We have long strived to build strong communities and deliver affordable, desirable housing options that serve the needs of our customers with both for sale and for rent offerings. We applaud the administration's commitment to improving the cost and availability of housing and look forward to contributing towards meaningful solutions. I also want to end by thanking our entire team for once again delivering results we are proud to share. Your commitment to our customers, communities and each other is second to none, and I am confident we will continue to navigate this market successfully.

Thank you to everyone who joined us today, and let's now open the call to your questions. Operator, please provide our participants with instructions.

[Operator Instructions] Our first question comes from Trevor Allinson from Wolfe Research.

I want to start with your views on the potential action from the administration to encourage volumes. And Sheryl, I appreciate your comments in the prepared remarks. Have you guys had conversations directly with the administration on the topic? And if so, can you talk about specifically what they're looking from you as a homebuilder. And do these conversations change your views at all on your approach to volume versus pace in the current environment?

Well, thanks, Trevor. Appreciate the question. As has been reported, there's a number of meetings that have been held, and honestly, I believe it's great for the industry that we're having these very productive conversations with the administration. The discussions are really about how we can overcome the housing shortages in this country and most critically, how do we make housing more affordable. We do have some excess inventory in the system. Everyone knows today that builders are working through, and we need to be very thoughtful of how that happens. But I think we can all agree that we have an affordability issue, and it didn't happen overnight, and it's going to require tremendous collaboration by a number of stakeholders to solve. It's a very complicated issue. But the good news is, it's getting tremendous focus by a lot of smart people. We need to tackle rising land costs, local regulations, so list just goes on and on. What I would tell you is we're in the early days, so more to come, but rest assured that Taylor Morrison and all the big builders want to be part of the solution on providing the right housing for Americans. And I'm quite confident given the meetings we've had that opportunities in progress. I'd also point you to the LDA statement that went out a couple of weeks ago. I think it did a really nice job representing the position of all the big builders. And as far as your second part of that question, we're going to continue to do the right thing, community by community, asset by asset, as we've talked about for years, Trevor, we don't make that decision globally. We really look at the balance of price and pace in consumer group in every community, and we'll continue to do that. It's not going to be helpful to flood the market with inventory that can't be absorbed. So we just need to be very conscious of the dynamics in each submarket.

Makes a lot of sense. I think that's a very logical approach. And then second, on recent demand trends, you talked about demand improving sequentially throughout the quarter, which is very encouraging. Are you seeing a difference by consumer segment just thinking as rates came down, did you see entry-level traffic become more entry-level consumers become more engaged? Or is it more broad across consumer segments? And then any color on if those improved trends continued into October?

Yes. Great question. I would tell you it's been pretty broad-based, Trevor. And I share just like in prior discussions that it almost comes down to once again community-by-community. For example, entry level, absolutely, we've seen traffic pick up, but we know we have affordability issues we're trying to solve for. When we look at our move-up and our resort lifestyle business, there continues to be increases in traffic, increases in web traffic, foot traffic. And actually, I'm quite encouraged specifically with the resort lifestyle as we move into the shoulder season, that's going to continue. That consumer group is more sophisticated. They know what's going on in the market. So the opportunity is to convert them from traffic to action. And we have a lot of tools, if it's anything from -- everything from our incentives, our mortgage programs to our new AI tool to help consumers get from start to finish.

Our next question comes from Mike Dahl from RBC.

Sheryl, talk of the -- as part of the sequential trends, I was hoping you could elaborate on incentives you talked in your remarks in the press release about kind of innovative and compelling. I mean, obviously, rate buydowns have been out there for years now. So what are you doing that's different? Is this kind of lower teaser rate? Is the [ arms? ] Like what do you think you're doing that may be playing a role in helping to drive that that customer on the sidelines?

Yes. I would tell you, honestly, Mike, it's all of the above. As you know, we continue to use both on the conventional and the FHA loans we're using buy downs. We're using adjustable loans. We also have proprietary loans for our inventory that's just gotten in the ground or specifically our to-be-built, really trying to stimulate that business. We have recently just introduced a new proprietary 9-month program for our to-be built. And I think most of those are done with Fannie and Freddie through the window, we've got a slightly different program. and it really gives our customers flexibility on a forward lock, but the security of a longer period of time, if they believe rates are going to drop. Obviously, in most of these programs, we also have the ability for a free float down. So I think for us, Mike, it's really about making sure we personalize each customer's experience, some of them need help with closing costs. Some of them don't know how -- are expecting to be in the house a long time, an adjustable program seems most helpful. Some need the confidence of a 30-year lower fixed rate. So it's really making sure we understand the customer needs, and we just have a plethora of programs to provide.

Okay. Got it. That's helpful. And then Sheryl, I know it's early to give '26 commentary. You did highlight a couple of things around community count growth, specs maybe being a bridge to help you a little bit in the near term. I think some of that probably alluded to the fact that your backlog is down nearly 40% in dollar terms year-on-year and probably end the year somewhat similarly. So the obvious question we get from investors is if you have a traditional kind of build-to-order build or go into the next year with backlog down that much, how can you possibly drive to even flat revenues, or do you have a significant gap out? So maybe -- can you just talk to how you're viewing that as you go into the spring? It sounds like maybe you're a little more willing to put some specs in the ground where others are pulling back a little, but just give a little more detail on how we should be thinking about that positioning.

Yes. I think you have to hit it from a number of angles. Mike. First of all, I I think we've been very clear that we're going to do -- look at each community and make sure we understand the right need and put the right number of specs in the ground. Our specs, as I said, I think both Curt and I said in our prepared remarks, are a little higher. We pulled back a little bit in the third quarter to see what happened to sales paces. We have the fourth quarter given the reduction in construction cycle, it gives us much more time, and I think back to a year ago where we probably had to have houses in the ground by January and February and probably no later than March depending on the community or market. Today, that can go until next July or August. You fundamentally picked up at least another quarter of production cycle next year. You combine that with our ability to add new to-be built well into next year and the community count growth. And then we're going to really seek to understand the market, and we have the platform to ramp up start if the market is there for. But as I said, we're not going to force inventory in the ground in some communities, we find that pricing has been less inelastic. And so we really have to make that decision community by community and balance profitability along with volume.

[Operator Instructions] Our next question comes from Michael Rehaut from JPMorgan.

Congrats on the results.

Thank you.

I wanted to first drill down on how you're thinking about -- you kind of -- to specific spec inventory, sorry, kind of saying early that it remains elevated. I think it's kind of one of the key reasons why you're looking for a little bit of a dip down sequentially in 4Q gross margins. I'm trying to get my arms around how you're thinking about this going into the first half of next year, if you would expect this kind of drag or headwind to remain in place or even accelerate if you're kind of working through excess spec inventory, let's say, at the current fourth quarter pace, when might assuming the market trends follow normal seasonality, when might that overhang dissipate?

Yes. I think similar to what I said to Mike Dahl, I think it's a balancing act, Mike. I mean, obviously, it's our intention to work through the inventory. And then we obviously have a lot of new communities that will be bringing new inventory to the market. place, and we'll be monitoring it month by month as we look at our fourth quarter starts. We've always said we're going to align sales pretty close to start. You saw us pull back a little bit on that in the fourth quarter because the inventory was...

Third quarter.

Excuse me, in the third quarter. Thank you. Going into the fourth quarter. And so we're going to play that by year. But we're in a position, if it's permits on the shelf, ready to respond to the demand in the marketplace. But like I said, we're not going to flood the market with inventory, so we're really going to pace it based on sales and opportunities.

Okay. I appreciate that. And I guess just looking at your different regions, you talked about September being a little bit better from a -- within the quarter and perhaps that's continued into October. From a regional standpoint, I'm curious if you've seen the strength more concentrated in any areas? And specifically, maybe you could kind of go around the world in terms of which markets remain on the margin stronger than average, weaker than average. We heard comments yesterday that maybe Florida is showing a little bit of signs of stabilization. So I love your thoughts on that as well.

Certainly, I'd be happy to. Yes, I would agree with the comments on Florida, Mike, we continue to be very bullish around Ford I think Florida was the last really adjust if we think about the last few years. But the good news is given how late it was to the adjustment party, we're already seeing green shoots on inventory, sales activity. When I look at our sales, half of our Florida markets were up year-over-year. In fact, Orlando has the highest paces in the country. Closings for the quarter were up almost across the board in all of our Florida markets. and half the market saw improvement in their margin in the quarter year-over-year. Heading in the shoulder season, like I said, I stay optimistic that we'll have a good season for the resort lifestyle business. We're also seeing a decent reduction in both new and resale inventory. And once again, I'm delighted to see that. And if I go to Texas, and you see it in the numbers, Mike, it was a tougher quarter from a volume standpoint, inventory have been elevated in Texas, if I kind of run around the state. Often, they've been at this for -- it feels like darn close to 3 years. So it does feel like we're starting to see the bottom, which I would say is encouraging, months of supply have come down. And it feels like it's holding pretty steady. We'll go a couple more months and see if that's true. But when we look at like underproduction QMI in the market, they settled to more reasonable levels, margin recovery. We've seen them up a little bit quarter quarter. And the land market, I would tell you, it continues to be tough. The teams have been very diligent in their assumptions not to get ahead of theirselves until we really find final pricing market. But the good news is we have a very strong portfolio of quality assets, and that will continue to carry the day. Dallas, I think it slowed down a bit, a little bit more. The lowest price points in Dallas are hypercompetitive. And most builders, it appears as we'll have subscribed to, I would say, more of an inventory strategy. Resales have remained generally stable, maybe up a bit. Once again, I'd tell you, our balanced portfolio gives us some great opportunities because it's a high-growth market for us as we look forward. Great land pipeline, margins are still strong. Probably the thing I'd point to in Dallas, and I think I said it in my prepared remarks, say that for times, prepared remarks, Mike, is the H21 buyers we've seen that both in the demand and from a cancellation standpoint. And then if I wrap up with Houston there, the first-time buyers it's competitive, very competitive for them. The good news is there's lots of them. It actually has one of our highest paces in the quarter in the country. our core communities continue to do well. But you have to put it on a relative basis. Paces are down from the peak levels, certainly in Texas, more than we've seen across the board. But I think our locations doing well, the ones in the core are doing better. Qualifications: Qualification seems to be the biggest issue for our first-time buyers there. And we're going to use both rate incentives buy down really every tool we have in box to assist these buyers get to a payment that they can afford. I'd probably describe it as competitive but steady. But like I said, we're back from our peak levels. Carolina is broadly doing really good. You can really start to see the difference between core and some of the fringe markets and our core assets are really nicely. If I move to California, we've been discussing for a while, on the capital front, we've really tightened up our investment. The communities we have in SoCal are doing well. We have pulled back the investment a little bit. Once again, SoCal is above the company average or even it's pull back from its peaks or absorptions are above average. If I go to the Bay, I would say Tech has had an impact on both probably Bay and Seattle. And if I go to Stack and the round out California, I'd say they're holding steady. They're getting more than their fair share in the marketplace. When I look at our resort lifestyle business there, we have one that's approaching closeout, one that's in the new stage -- in the newer stages of opening without the amenity. So those are kind of balancing each other out. I'd say Sacramento overall stable, consistent community count paces year-over-year. And then maybe I'll wrap up with Phoenix. I think that market probably provides the most diverse offering across all consumer groups for us. It's a balanced market with our to-be-built and inventory offering. We've seen good improvement on cycle times. We definitely, with our move-up buyers here, have a more discerning buyer, but we have the options to meet their needs cases have been constant sequentially. Once again, I'd say this is a market that's kind of punching about their weight, strong margins for us and modest incentives compared to the rest of the country. In the land market is a little bit mixed. We're seeing some wonderful opportunities. We're very deal specific. We've been able to renegotiate terms and price. We've seen just coming out of an auction, a state auction that was pretty frothy. So a little bit of everything in the marketplace. I just wrap Mike, with just a macro that I know there's been a lot of discussion on California. I mean, excuse me, Florida and Texas. But when you look at migration patterns, they're still leading the country. They continue to be very important markets for the industry. Consumers still have strong equity in their homes, income, net worths are growing. So I'd say the green shoots are starting, but Eric, I'm sure I missed a lot. Anything you can think of?

You covered it, long term, excited about the population gains and net move-ins that we've seen in those markets over time. And specifically, as you think about months of supply and price in the resale market or 2 key indicators we blocked carefully seeing some real stabilization. A few examples, maybe Sarasota and Tampa, by way of example, where months of supply are actually down and pricing has stabilized, so no real movement there. Houston has been interesting. And that the months of supply are down about 4% on a moving average and stable pricing. And so some real examples of some stabilization. Of course, we'll continue to seasonality and evolution. And on the new inventory side, the cycle is a little different than all others. There is always a little bit of seasonality. But we continue to monitor that core versus noncore benefits that we think we have.

It really [indiscernible] in performance.

Right.

Yes.

Our next question comes from Matthew Bouley from Barclays.

So I wanted to ask on the, I guess, the over 100 new communities to come next year. I'm curious any detail on how that may break out either from a regional or product perspective? And Specifically, I'm curious on your Esplanade expansion. I think you said it's still hanging around kind of 10% of sales today. I know you guys -- you've got some ambitious goals of expanding that product. So should we expect to see any movement on that mix of Esplanade next year as well with all those openings?

We really leaned in, Matt, talking about '26. So we're not going to go too far, but I will give you a tidbit I'll give you an Esplanade specifically. We have 3 new Esplanade opening in the first quarter, along with amenity centers, 9 holes of golf in 1 of our communities. So very exciting. When I look at next year and just across the end portfolio with the amenities that are opening along with new communities. I think we're excited, very consistent with what we discussed at our Investor Day. But I think before we get into more detail, on communities, Curt, anything you want to add to that. We really want to wait until next quarter.

Yes. I think we'll wait, Matt, until we kind of wrap up the year. But as you can imagine, I think the outlet growth will be pretty broad-based kind of throughout the country. So I think we'll leave it at that for now, and we can handle that more when we wrap up the year.

Okay. Got it. I appreciate that. Secondly, just SG&A. It looked like a lot of leverage there despite sort of flattish homebuilding revenue year-over-year. Can you speak a little more around what you're doing to control costs here? Was there anything onetime in that results? Or should we think you've kind of found a new run rate level here in Q3 that we can kind of use to model out the next year on SG&A.

Yes, Matt, thanks for the question. SG&A, yes, that's a focus of ours. Ideally, it's part of the culture. The teams are focused on it. We're constantly looking at kind of our throughput kind of results that we get on various metrics. In the quarter, specifically, we benefited from some lower kind of payroll-related costs and lower commission costs as well. And as we said in our prepared comments, we're tracking to be in that mid-9% range for the year. So all in all, I'm very happy with where we're at from an SG&A perspective. The teams are focused on it. and we're doing a lot of good things from a cost control perspective. And I should also highlight the fact that from a back office standpoint, we're continually trying to find ways to improve kind of how we're operating whether it's our shared contract kind of program that we have. We're centralizing all of our contracts, and we're moving the needle on that as well on some of the other aspects of the business.

Yes the other one I'd point to, I think our contracts department that we've got in place for a year now, right, where all the contracts are centralized. I think that's a good one. I think the other one I'd point to, Curt, is what we're seeing in the reservation system, I mean, even just in September, we saw about an 800 basis point reduction from our overall business to those that came in reservation and go growth. So if we can keep that up, generally, month-to-month, we've been seeing 400, 500 on average, 800 was September was a peak for us. But obviously, the more we get through our reservation system with that reduction that will continue to show the leverage in the SG&A.

[Operator Instructions] Our next question comes from Alan Ratner from Zelman Associates.

The detail so far and nice quarter. I guess just first on the SG&A, just since that was the last topic there. I'm just trying to back into what the implied guide for 4Q is and to get to mid-9s for the year. I think it does imply that, that rate does tick up a bit sequentially on a fairly similar revenue base. So is that just some conservatism around that 800 basis point reduction in the broker side that you just mentioned, Sheryl, or is there some other thing that I should be aware of on that?

Alan, I think it's a couple of things. Yes, we are potential influx of commission costs for Q4 as what we're seeing from some of the competitors in the marketplace and what everyone is doing to drive maybe their closings for the year.

With brokers, right?

With brokers. And then what I would also say is that based on our guide of the midpoint of our range of 3,200 units with our average sales price at $590,000 we are losing a little bit of leverage just because of the top line is going to be a little bit less than it was in Q3.

Got it. Okay. Understood. Second question, and I apologize, I missed some of these numbers, but I thought the detail that Eric gave surrounding some of the successes you've had on land renegotiations. It was really encouraging to hear. So I was hoping, first, can you just repeat that? And second off, on the deals where you were actually able to get lower pricing, can you quantify like what maybe the margin impact is on those particular projects and just the general timing of when we should expect to see that benefit beginning to flow through?

Alan, yes, great question. I appreciate it. It was about 3,400 lots in the quarter that rolled through our investment committee that were renegotiated. And that renegotiated. Renegotiation took the form of deferrals. So those on average were about 6 months. But a relatively surprising level were actually on price, and it was basically an 8% decrease in the original purchase price on deals that we're rolling back through the investment committee that has been negotiated from fourth quarter '23 through relatively current. So as you think about navigating this particular cycle, it's been interesting to me participating in it. But this one has been relatively quick in terms of seller receptiveness for the call, but also our proactiveness and making sure that we're playing offense and communicating clearly, and we've seen success. And so maybe to your question relative to what should we expect? As we review deals that we had an original expectation in terms of gross margin and return production. We want to make sure that we're holding those. And sometimes that does require an adjustment. And so I wouldn't say that's going to result in significant upside, but we are maintaining our original expectations in most cases. And then in terms of timing, those are going to roll through over time. So again, relatively current on deals that we'll be closing on the few months developing. And so it's going to take some time for that to roll through the system. The last thing I would say, interestingly, as we're talking about the land environment, this one being a little bit different than past is we have seen some interesting finished lot pickups. And so about 25% of the land rolling through our system most recently are actually finished lots, and those have been difficult to sign over the last couple of years. And I think that's likely the case of some other builders may be walking from deals on our ability to renegotiate those in a way that makes sense for us. And as I alluded to, we're also seeing some development costs release. So those would be a couple of our upsides that we see.

And Eric, would you -- just so we don't get over our ski tips. I mean, it's been interesting, right? Because to your point, we've had some tremendous renegotiation, and we've had other guys that just won't move, and we've been forced into a position to walk away.

Completely agree. The success cases I mentioned are the deferrals and the purchase price reductions and in some cases, just some restructuring of the deal. But there are also instances where they just don't work, and we're standing our ground and just having to walk from those. And so that -- you'll see roll through the system as well.

Eric, can I squeeze in 1 more on that topic because I think it's really interesting. Have you seen any common thread on the deals that you have been able to renegotiate? Are you more -- are you seeing more success with, say, land bankers or kind of your more institutionalized land sellers and developers or more success perhaps with kind of the one-off mom-and-pop landowners, farmers, et cetera. Just curious if there's a common thread on the deals that people are kind of holding their guns versus the ones that seem to be a bit more willing to negotiate?

Yes. It's really all categories, Alan. And so we start with the seller financing, asking, can you just carry this and we need some more time on it. And so we've seen success there. The land banking appetite continues to be relatively strong. And so we use that in a surgical way where we can optimize our return by using land banking. But I would say the supply of the availability of land banking is very high. And then lastly, with regard to just the price changes. As I mentioned in those 3,400 lots, about 75% of a lot actually resulted in some kind of price change. And so it's been really interesting as we think about the solutions, which are made.

Our next question comes from Rafe Jadrosich of Bank of America.

It's Rafe. I wanted to just ask, in terms of the incentive change, you comment sort of that entry level was where you're seeing the most pressure, but you're also seeing some hesitancy on the move-up in resort lifestyle. Can you sort of quantify where the margins are for each of the segments? And then maybe how much the incentives have changed for each of them? Like how different is it across the different segments?

Yes. I mean the incentives by consumer group I always hate averages because I think it doesn't tell the whole story. But certainly, you would expect our most expensive incentives go with those forward commitments. And those are generally our first-time buyers, and we're having to help them get the rate as low as we can. So as to total dollars -- the sales price is less, so the total dollars are a little less, but the percentage, that's where, once again, I think, our most expensive fit. You go all the way to the resort lifestyle buyer where that's -- that ASP is probably about $200,000 higher than our average. And those folks aren't generally as concerned about interest rates. And so those incentives work differently. We'll see a lot of support there on helping them with options. If you spend this, we'll give you that. Sometimes it's reduction in lot premiums. They're more sophisticated. They know what's happening the market, they don't want to overpay. And if they can't get it in a mortgage incentive, they want it somewhere else. But I'd say, generally, we're using incentives across the board. It's just how for each customer. But I went point to significant differences in range, except for the call out that our most expensive incentives tend to be with first time [indiscernible] purchase that.

I think generally speaking, you're in the ballpark. And Rafe, we don't really provide kind of margins based on kind of the segment overall, but I think you could probably imagine I think what we have said in the past is that our resort lifestyle margins are typically the highest kind of in the portfolio. So -- but to Sheryl's point, it comes down to kind of each buyers specific situation, and we apply, and we try to align the incentive to maximize each buyer situation.

Okay. That's helpful. And then sort of mentioned that cycle times are par, but they're still coming down. How do we think about how much higher the backlog conversion can go? And then how much opportunity do you have on the cycle times from here? How much more can may come now?

Yes, Rafe, I would say that just from a cycle time perspective, we're essentially at pre-COVID levels for the most part. We have a couple of markets that maybe still have a little bit of opportunity to kind of run through the tape there. So we do feel like there's continued opportunity there overall for the entire business. Relative to the conversion kind of rate, I think we were at about 74%, 75% in Q3. And based on our closing guide and where backlog is today, I think you can expect that, that conversion rate will be higher in Q4 just based on kind of the sheer numbers of the numerator and the denominator there. So you can expect that to be higher probably in Q4 than it was in Q3.

Is that like a sustainable level going forward, or is that just because of the mix of spec relative to [indiscernible]?

Yes. Rafe, it's more of a function of where specs are today. As you've heard Sheryl talk about, we intend over time to be able to see it in flux or to raise the level of to be built over time. So it's a point in time kind of where we're at today. And then as I said, we'll see what we can do on the to-be-built side of the business in the coming months and quarters.

The next couple of quarters are going to likely be higher.

It's going to be a higher conversion for the next couple of quarters, yes.

[Operator Instructions] Our next question comes from Ken Zener with Seaport Research Partners.

So a couple of things here, just kind of housekeeping, but with incentives, if you were to think about the bucket, I think some of the builders have been described at least to me like half of the incentive is the price reduction and then the other half is kind of split equally between mortgage buydowns and closings. Do you -- within those 3 buckets, do you have a comment?

Yes. I would tell you that moving a little bit quarter-to-quarter, and it will be a little different if you're talking gross or net price or you're talking units. But somewhere around 45% of our incentives are specific to financial services and a subset of that would be what we would call the most expensive forward commitment. And then the balance, the other 50% is going to be a combination of all the other things we've talked about, it could be option because you [indiscernible]. In some instances, we may have had to reset pricing to market, but it's a combination.

And just to be clear, when you say financial services, Sheryl, it's -- you're recording all that stuff in the homebuilder segment, net pricing. Is that correct, or is there stuff running through financial services, just to be clear.

No, it's coming through the margin. Most of the financial services are running through the margin. I mean, actually, all of them, some are running through ASP and some are running through cost of goods.

Right. Okay. Just wanted to clarify. And then, obviously, with orders, you generally want to follow your starts will generally follow your orders. I'm just wondering, looking back, so 3Q starts for below orders, both down inventory units makes sense. 2Q was higher. And the idea was there you wanted to build, right, to have a spec, which -- if, let's say, spring is softer than expected, would you guys still be in a position where you want to keep that volume up relative to the start volume up relative to orders. And I'm thinking you did so much work on the fixed G&A, right? It's like down 20% comparable to your inventory units. I'm just trying to think about how your guys' playbook works there, or if you really just have starts follow orders, wherever they go in spring of next year.

Yes, Ken, great question. At this point in time, relative to next year, we're probably not going to get into specifics there. But what I can say is we're going to continue to probably -- we've adjusted our starts in Q3 relative to sales to kind of rightsize our inventory position. And generally speaking, we're going to stay sticky from a start standpoint to sales, but then it's going to come down to a community-by-community kind of analysis, and how each community is doing, and we'll fluctuate that as necessary based on a, the community. Entry level is going to be more spec. Town homes are going to be more spec. And then of course, as we move our way up in the consumer segmentation profile, we'll look to kind of hopefully pursue more to-be-built business. But I think the market is going to tell us and lead us to that path down the road.

Okay. No, I appreciate that. I was trying to get next year's guidance as much as kind of your thinking about when starts go above and below orders.

Thanks, Ken.

Our next question comes from Jay McCanless from Wedbush.

I wanted to ask, where is the spread now between spec closings and build-to-order closings?

On a closing standpoint, we were 60-40, 60% spec or 61% spec and 39% to-be-built for the quarter.

Okay. And then what's the gross margin spread on that now?

Yes. We continue to run in that several 100 kind of basis points. As you can imagine, Jay, nothing new there within our Esplanade communities with the high premiums and the high option revenue, we can see some of these differences get up to 1,000 basis points. So -- but generally speaking, it's at several hundred basis points we continue to track to.

I also believe do you think it's fair, Curt, even within our Esplanade, non-Esplanade resort lifestyle, we have a spread, right? Because our S1 tends to deliver the highest and our non-Esplanade [indiscernible] targeted restricted a little lower.

Okay. And then the second question I had, it's encouraging to hear that maybe the land prices are breaking a little bit. But just as we think about when that can start to help the gross margin? Is it going to be a back half of '26 event? And also, 1 of your competitors called out there was a small number, I think it was like $1,500 per home tariff impact. Have you all tried to assess what impact the new tariffs might have on costs for next year?

I'll start with land, Jay. From a timing standpoint, this is current updates to our underwriting. So you're probably practically not going to see it really roll through until '27 and beyond for most of that. And in some cases, I would tell you that it's -- we're just holding our original underwriting expectations in terms of retrading, and in some limited circumstances, we are seeing some opportunistic deals roll through, and those are the ones that you might see some future upside on. But kind of a blend of the 2. I would just -- and then with regard to tariffs, I'll just make a brief comment on the land market, and Curt can take the balance and vertical. But we are hearing from our teams that, generally speaking, on the land development standpoint. And there's not going to be a whole lot of specific tariff impacts, but kind of the magnitude of 5% to 6% release on cost on the development side.

Yes. And Jay, on the House side, yes, I think we subscribe to the thinking that it will be a modest increase from a tariff standpoint. There's the cabinet stuff that came out, the vanities, the steel is out there. But again, I think what I would also add to that is, we're doing a lot of things behind the scenes just from an operational kind of execution standpoint, working with our trade partners, our suppliers on what I'll call cost reduction strategies that the teams are doing a great job working through. I would also add that we've recently hired a new National VP of Purchasing and Construction that is helping us lead that charge, and that's one of its focal points as well. So all in all, I think we have a pretty good balanced approach in dealing with the tariff potential increases through some of the other things that we're working on behind the scenes relative to our cost reduction strategy in light of some of the start activity that we're seeing.

We currently have no further questions. So I'd like to hand back to Sheryl Palmer for any further remarks.

Thank you very much for joining us for our third quarter call and wish you all a wonderful holiday season, and we look forward to talking to you early in the new year.

[indiscernible] today's call. Thanks everyone for joining, and you may disconnect your lines.

Good morning, and welcome to Taylor Morrison's Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I'd now like to introduce our host, Mackenzie Aron. Please go ahead.

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. These statements 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, Sheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer.

I am pleased to share our second quarter results, which met or exceeded our guidance on substantially all key metrics despite the unique environment. We delivered 3,340 homes at an average price of $589,000. This produced $2 billion of home closings revenue with an adjusted home closings gross margin of 23% and 90 basis points of SG&A expense leverage.

Our performance reflects our diversified product portfolio that serves a broad and well-qualified consumer set with to-be-built and spec offerings concentrated in core locations. Especially in volatile markets, this balanced strategy is a valuable differentiator that we believe contributes to greater financial resiliency.

As I shared on our last call, the start of the spring selling season have been muted as consumers digested stock market volatility, tariff uncertainty, immigration reform and high interest rates. As the season progressed, sales trends remain softer than normal with some choppiness throughout the quarter. This drove moderation in our monthly net absorption pace to 2.6 per community.

Although this was consistent with our historic second quarter average, it was lower than our expectations in normal market conditions due to increased competitive pressures, especially in first and first move-up locations as well as a pickup in cancellations. In this environment, our overall bias between pace and price leans more heavily towards price and ultimately, margin and returns, given the value of our attractive land positions, desirable communities and discerning customers, especially in our amenity-rich move-up and resort lifestyle neighborhoods.

We continue to believe that our emphasis on working with each customer hand-in-hand with our Taylor Morrison Home funding team to personalize incentives is the most effective way to create value for both our buyers in our company. This process allows us to educate and inform our customers through prequalification and tailored programs that provide stability and strengthen their financial goals and needs during homeownership.

We pride ourselves that our mortgage programs are aligned to serve the consumers that most need to support. As an example of just one of our programs that has proven successful in driving traffic and assisting a small subset of customers with their financial goals has been a recently introduced 3.75%, conventional 7-year adjustable rate mortgage with no discount fees.

To put the power of such an offer in perspective, this promotional interest rate would increase our typical customers purchasing power by about $138,000 on a $500,000 home financed with a 20% down payment as compared to financing and market interest rates. The point being assuring that we have a wide range of programs and products to meet each customers' needs continues to be key to our success.

Affordability continues to be top of mind for our first-time buyers, while quality of community and choice remain critical for our other consumer segments, as Erik will detail in just a moment. We are by no means immune from the headwinds facing our industry. However, we believe our strategy of serving well qualified homebuyers across the consumer spectrum with a well-balanced portfolio of to-be-built and spec homes primarily in attractive core submarkets where fundamentals tend to be healthier throughout housing cycles, provides important benefits, including a more stable gross margin profile.

In contrast to significant industry gross margin compression, our adjusted home closings gross margin has been relatively range bound between 23% to nearly 25% for the last 2.5 years. This is much stronger than our historical average due to the improvement in our scale and operating capabilities.

And most importantly, as we look ahead, our gross margin is expected to remain within the bounds of our long-term target in the low to mid-20% range despite the outsized incentive offers and overall pricing pressure, we are competing against, especially on spec sales.

The prevalence and depth of these incentives has shifted consumer preferences even among traditionally to-be-built customers towards spec homes as some are willing to trade personalization for the deeper incentives currently available for spec inventory across the industry.

As a result, our share of spec sales increased in the second quarter to a new high of 71%, including a higher than typical 50% in our Esplanade segment. With specs carrying gross margins below that of to-be-built homes, we expect that this temporary mix shift will impact our home closings gross margin in the third and fourth quarter as our margin is expected to moderate sequentially to approximately 22%.

However, for the year, our adjusted home closings gross margin is still expected to be approximately 23%. And longer term, we expect our business to remain more equally balanced between to-be-built and spec home offerings.

By Consumer Group, our second quarter orders consisted of 33% entry level, 50% move-up, and 17% resort lifestyle. As a reminder, in the first quarter, our overall resort lifestyle segment was the only to post year-over-year net order growth during its peak selling season, while our move-up sales were roughly stable and the entry level was down most deeply.

In the second quarter, we saw more consistent sales activity across the consumer spectrum with our resort lifestyle and entry-level segments, both down in the high-teen range, while our move-up sales were down in the mid-single digits driven by a shared lack of urgency due to less confidence.

With our broader resort lifestyle portfolio, our Esplanade communities, which account for about 10% of our total, have held up with greater resiliency as we would expect, given its affluent customer base. In the second quarter, Esplanade's net sales orders declined just 8% versus 12% in total for the company and its home closings gross margin was slightly improved year-over-year in the high 20% range. This strong margin is driven in part by outsized combined average lot and option premiums of nearly 270,000, 3x out of the rest of our business.

During the quarter, we broke ground on our newest Esplanade in [ Summerlin], outside of Las Vegas, which already has a robust interest list even before we have initiated our first campaign for the community. We remain committed to a robust expansion of this unique brand in the years ahead.

Taking a step back from our current sales environment, we believe the need for affordable, desirable new construction remains intact across our markets of operations, given the aging of the population, migration patterns and evolving buyer preferences. We believe that our diverse portfolio is well positioned to serve this need in the years ahead.

While the near-term outlook calls for a more patient growth trajectory as we prioritize capital efficiency and returns over volume in today's intensely competitive marketplace, we strongly believe we have the platform and opportunity to jumpstart growth as market dynamics stabilize.

In the meantime, with a healthy land pipeline already controlled and healthy balance sheet, we have flexibility to return capital to shareholders on top of the roughly $2 billion we have invested in share repurchases since 2015. As you would expect, our teams are highly focused on controlling costs and working with our trade to further increase production and purchasing efficiencies, which has driven year-over-year improvement in our stick and brick costs.

Additionally, our one-of-a-kind digital sales environment is another source of meaningful cost savings that continues to gain traction and support our healthy SG&A structure. Across the business, our operating priorities are grounded in a disciplined model that we expect can generate mid- to high-teen returns on equity throughout the course of the cycle, including this year. With that, let me now turn the call over to Erik.

Thanks, Sheryl, and good morning. At quarter end, we owned or controlled 85,051 homebuilding lots. Based on trailing 12-month closings, this represented 6.4 years of supply, of which 2.6 years was owned. We control 60% of our lot supply via options and off balance sheet structures up from 57% a year ago. We continue to make steady progress towards our goal of controlling at least 65% of lots.

During the quarter, we invested $612 million in homebuilding land, 43% of which went towards lot development. For the full year, we continue to anticipate our total homebuilding land investment [ year round ] $2.4 billion with a downside bias given our heightened diligence in these market conditions. As always, our ultimate cash investment will be dependent on our use of financing tools and market opportunities as the land market has recently exhibited some softness.

As a reminder, all previously approved transactions as well as future phases of development are rereviewed by our investment committee for final alignment or any necessary adjustments before closing. We remain committed to executing as a community developer as the vast majority of our prospective customers tell us that they value the community at least as much as the home we provide.

While time lines associated with entitlements remains the most notable development challenge, tariffs have not had a meaningful impact to our horizontal costs. And in fact, these costs have moderated and access to trades at ease. We continue to keep a careful eye on competitive and supply measures across our portfolio.

Our research suggests that our spec count by community is less than the new home averages in the majority of our markets. which we believe is a function of our core location focus.

With regards to resell inventory, there has been some moderation in months of supply across many of our Florida and Texas markets and the average months of supply for our overall market footprint was lower than the national average. To focus upon our consumers for a moment, we've engaged them in attempts to more deeply understand their sentiment.

Among our shoppers hesitating, our surveys indicate that their primary concern is the overall environment and less so their own personal financial situations. When market conditions stabilize, we believe this suggests that shoppers will be willing and able to move forward with their desired home purchase.

We are pleased that despite a more challenging demand environment, our customer satisfaction scores have increased as we engage with both our shoppers and buyers, validating our efforts of creating a differentiated customer experience.

Lastly, I wanted to provide a brief update on our [ for rent ] Yardly business. With long-term confidence in positioning this operation to provide an efficient model targeted to address housing availability and affordability challenges by leveraging our core competencies and land and construction. We continue to navigate the interest rate environment and evaluating optimal project disposition strategies. At this time, we now expect to exit as many as 4 communities this year.

As detailed in this morning's press release, we have executed a flexible finance facility that will enhance cash generation, balance sheet relief and greater optionality as we seek to optimize returns over time in targeting asset exits. The magnitude of this facility is material covering total project costs of $3 billion, serving both existing and new acquisitions.

Kennedy Lewis, with whom we have significant land banking experience will be the capital provider, and we are jointly committed to our unique platform and bringing efficient communities that will assist customers who simply cannot afford a new home today, but who desire a single-family living experience. With that, I will turn the call to Curt.

Thanks, Erik, and good morning, everyone. For the second quarter, reported net income was $194 million or $1.92 per diluted share, up from $1.86 a year ago. After excluding inventory impairment and certain warranty charges, our adjusted net income was $204 million or $2.02 per diluted share, up from $1.97 a year ago.

Our closings volume increased 4% year-over-year to 3,340 homes, slightly ahead of our prior guidance of approximately 3,200 due to a higher number of specs that were sold and closed during the quarter. The share of closings from specs increased to 65% in the second quarter from 58% in the prior quarter and 59% a year ago.

This higher spec penetration contributed to a 2% decline in the average closing price to $589,000. This was slightly ahead of our prior guidance of $585,000. As a result, home closings revenue increased 2% to approximately $2 billion.

With 8,192 homes under production at quarter end, including 3,888 specs, of which 842 are finished, our inventory remains slightly elevated compared to targeted levels. Therefore, we expect our spec closings penetration to remain higher than normal through year-end as we prioritize the sale of these homes and meet recent customer preferences for quick move-in homes.

We also expect to slow our starts volume following a monthly starts pace of 3.4 per community or 3,500 homes in the second quarter, which allowed us to put the universe of homes in the ground for our full year delivery target. For the remainder of the year, the expected slowdown in new starts will be community specific as we look to optimize our working capital and manage our inventory.

Also, in support of reduced starch volume, we continue to see improvement in cycle times throughout the build process. We realized more than 2 weeks of sequential savings in the second quarter, driven by both to-be-built and spec home production. We believe that this ongoing improvement strengthens our ability to flex our growth potential as market conditions evolve.

For the full year, we still expect to deliver between 13,000 to 13,500 homes, including between 3,200 to 3,300 homes in the third quarter. Based on the anticipated mix of deliveries, we now expect the average closing price to be in the range of $595,000 to $600,000 for the full year including approximately $600,000 in the third quarter.

In the second quarter, home closings gross margin was 22.3%. Adjusted home closings gross margin, which excludes inventory impairment and certain warranty charges, was 23%, in line with our prior guidance. As we look into the remainder of the year, we expect incentives to increase and our spec penetration to remain higher than typical as we continue to normalize our inventory position.

As a result, we expect our third quarter home closings gross margin to be approximately 22%. Excluding the inventory impairment and warranty charges realized in the first 6 months of the year, we expect our full year adjusted home closings gross margin to be approximately 23%. Including the charges and assuming no additional charges through the remainder of the year, we expect our GAAP full year home closings gross margin to be approximately 22.5%.

Now to sales. We generated 2,733 net orders down 12% year-over-year as our monthly absorption pace moderated to 2.6 net orders per community from 3 a year ago. At quarter end, we had 345 communities consistent with our prior guidance. Based on our updated sales expectations and timing of community openings and closings, we now expect our ending outlet count to be between $340 million to 345 in the third quarter and approximately 350 by the end of the year.

Our cancellation rate was 14.6% of gross orders, up from 9.4% a year ago. As a percentage of our beginning backlog, cancellations were 9.2%, up from 5.2% a year ago. While this increase reflects the change in consumer confidence of late, we believe this remains below industry averages, reflecting our strong customer profile, prequalification processes and backlog customer deposits of approximately $47,000 per home.

SG&A expense as a percentage of home closings revenue was 9.3%. This represented 90 basis points of year-over-year expense leverage due primarily to lower payroll-related costs and commission expense. For the year, we continue to expect our SG&A ratio to improve to the mid-9% range due to proactive management of our overhead costs, ongoing back-office consolidation efforts and growing efficiencies from our digital sales tools.

Financial services revenue was $53 million with a gross margin of 51.1% and up from $49 million and 42.5%, respectively, a year ago. Helping to manage our incentives effectively, our financial services team achieved a strong capture rate of 87% during the quarter. Among buyers using Taylor Morrison Home Funding, credit metrics were healthy and consistent with recent trends with an average credit score of 751, down payment of 22% and household income of $188,000.

Turning now to our balance sheet. We ended the quarter with liquidity of approximately $1.1 billion. This included $130 million of unrestricted cash and $952 million of available capacity on our revolving credit facility. We continue to have financial flexibility with our net homebuilding debt to capitalization ratio, equaling 22.9% at quarter end and no senior note maturities until 2027.

During the quarter, we repurchased 1.7 million shares of our common stock outstanding for $100 million. At quarter end, our remaining repurchase authorization was $675 million. For 2025, we are now targeting total share repurchases of at least $350 million. Since 2015, we have repurchased a total of approximately $2 billion of our shares outstanding or roughly 60%, helping to drive improved earnings and returns for our shareholders.

Going forward, we remain committed to both programmatic and opportunistic repurchase strategies to manage our capital and take advantage of the attractive valuation opportunity in our equity. Inclusive of this year's repurchase target, we expect our diluted shares outstanding to average approximately 101 million in the full year, including $100 million in the third quarter. Now I will turn the call back over to Sheryl.

Thank you, Curt. In closing, I would like to highlight that we released our annual sustainability and belonging report earlier this week on Monday. This year, the report is built around the theme of resiliency, a term we believe, captures not only our financial performance in the face of challenging market dynamics, but also the performance of our homes as well as the long-term desirability and livability of our carefully planned well-located communities.

This intentional effort to build resiliency into every facet of our operations is core to who we are as a builder and community developer as you can read more about in this week's publication.

To end, let me express a tremendous thank you to the Taylor Morrison team. I am continually impressed by our team members' execution and enthusiasm to be the best we can be. Thank you to each of you for all you do, and all you will do to make the second half of the year a success. Now let's open the call to your questions. Operator, please provide our participants with instructions.

[Operator Instructions] Our first question comes from Matthew Bouley from Barclays.

I guess I'll start with a question on the spec mix in the quarter. So that's 71% of sales, I think you said. I guess my question is, is that -- is that kind of like a market-driven, I don't know, softness on the to-be-built side, kind of increasing that spec mix, therefore, sort of your own decisions around price over pace with the to-be-built side, I mean it seemed like the spec production at the end of the quarter was not too different versus Q1.

So I guess just trying to understand the reasoning behind that jump in spec and then obviously going forward, should we expect it to kind of stay at these levels? It sounded like that's what was expected in the second half, but just any more detail on that?

Mike, thanks, and great question. Matt. Sorry, Matt. Relative to the specs, I think last quarter, when we talked about what kind of Q2 was going to be, we kind of set that up that we were going to have a higher spec concentration overall coming through the P&L based on kind of some of where the inventory was throughout all of our communities, whether it's entry level and/or move up, and as Sheryl alluded to, even from kind of a resort lifestyle, so it's a function of that.

And on a go-forward basis, we still expect that we're going to continue to have a higher concentration of specs coming through here in the near term kind of as we work our way through the year. But going forward beyond that, we continue to kind of be fans of a more balanced kind of approach relative between the mix between our specs and to-be-builts.

Yes. And I think, Matt, Curt's, exactly right. The only thing I'd add to it is -- and you nailed it in your question, it absolutely is a function of what we're hearing from the consumer. Erik can go into more detail, and I think some of his comments articulated that the buyer has really begun -- the consumer has really begun to understand the value proposition that's available with inventory homes.

Even in some instances where we would generally expect to see a to-be-built buyer and some, it's not one size fits all, some to be built to absolutely know what they want and are willing to pay for it a little differently. But the consumer understands the incentive environment that's sitting with inventory and they're prioritizing that in their decision process. So we want to make sure we have the inventory in the market to address it.

And maybe just to triple down really quick, Matt, we do ask our consumers. We've been asking them for years, what percentage of you -- of shoppers need a spec, have an interest inspector would be open to a spec. And it's been really interesting to see over the last couple of quarters to see that elevate. I think, to Sheryl's point, to some degree, it's because of looking for that deal and the economics. But we've tended to try gravitating our spec count for the demand from our shoppers.

Yes. And the only real difference for us is we are seeing a stronger pickup in what I would say that move up or even the resort lifestyle buyer, which generally that was a smaller piece of that business.

Okay. Got it. Yes. No, great color. Helpful. Yes. So a lot of it seems like consumer driven and you guys making sure you have the right product on the ground for where that demand is. Okay. Super helpful.

So then, I guess, secondly, just jumping down to the gross margin side. Just to double-click on that. I mean it sounded like the spec mix was behind the Q3 gross margin guide. I just wanted to check if we're talking [ '23 ] adjusted for the full year, is the implication that the fourth quarter is actually expected to be higher than the third quarter within that or roughly flat? Just any kind of detail on the kind of cadence there in the second half.

Yes, Matt, another great question. As we kind of look at it, we've guided to Q3 that we're expecting 22% for Q3 based on the higher spec penetration. For the full year, when we kind of think about what adjusted margin is for the full year at roughly 23%. I think you can probably do the math on there, and I think it's going to be pretty close to around 22% for Q4. We're not guiding to that right now. But I think just based on how the math falls out, it will be approximately 22%, roughly speaking in Q4.

And probably you agree, Curt. The only thing that will move that one way or the other, generally speaking. Obviously, you have a mix impact, but it's really going to come down to what happens to rates and the incentive load based on the forward commitments, the programs that we have available for the consumers in the mortgage market.

Our next question comes from Michael Rehaut from JPMorgan.

A little bit into the announcement with Kennedy Lewis regarding a $3 billion facility. The press release cited greater -- some balance sheet relief and greater optionality, specifically, I guess, in terms of disposition of assets.

So I'm kind of curious in terms of if this would -- if this agreement is going to result in some movement of assets off of your balance sheet into the facility, I suppose? Or -- and if you could just go into a little more detail in terms of the -- what you mean by greater optionality and if there's an improvement in perhaps cost of financing for the projects?

Yes. Mike, I'll start with that and good question. I appreciate it. We're really excited about it. As we've mentioned, too, in the press release, we've done some business with Kennedy Lewis before. We understand how each other think. And I think this works for both of us.

And so to answer one of your questions relative to current assets versus prospective assets, the facility is intended to serve both. And so we do own about 35 assets and a fair number of those were contemplated to move over in the facility in the coming couple of quarters. And then, of course, as we think about new deals, the intention is for those to go into that facility as well.

For all intents and purposes, from a functional standpoint, it's akin to a land bank and now we jointly underwrite deals. Kennedy Lewis would be assigned the contract, they would purchase it, and we would pay for a kind of an interest rate along the way. The interesting thing on this one is that it will serve all the way through stabilization of the asset through vertical construction.

Lastly, on the optionality piece, I would tell you that our job is the option to basically optimize the value of those assets. And as we think about the competitive arena for each asset in terms of what other assets are available around it, as well as cap rates where we are from a leasing standpoint, lease rate. And so it just provides a little bit more timing in terms of just having the ability to optimize the value of each asset as we think about the environment and the valuation that the market is telling us.

And Erik, is it fair that on the existing assets, land tends to be the smaller piece of the overall investment. We won't get the -- even then we'll move when we won't necessarily get the balance sheet relief, but we'll get all the support on the development side.

Very true. So yes, typically, the land burden as a percentage of the total revenue for these assets is a little bit lighter. So to Sheryl's point, we do expect the magnitude to be noticeable as we think about conveying those early assets, but some of them are just land. It's not going to be a huge dollar amount day 1.

Okay. So in terms of just the -- just to clarify, when you talk about moving some of the assets off the balance sheet, that -- are you talking about maybe like initially, it would be a couple of hundred million, and so it wouldn't have that much of a demonstrable impact on return on assets or return on equity?

For the overall organization, perhaps not. But like I said, as we alluded to, it's $3 billion. So we do expect it to ramp over time. So really not framing the day 1 magnitude. But like I said, of those 35 owned assets, 13 of them are with the prior joint venture that we've alluded to. And so the balance, most of the others are intended to transfer over.

Okay. Then just secondly, in terms of maybe trying to get an early sense of growth for 2026, you've obviously laid out goals in terms of where you want to get over the next several years. You had a competitor talk maybe about community count growth. One of your larger competitors at least maybe in the mid- to high single-digit range for 2026. Just given the current backdrop, given your own land option and owned pipeline, is that a reasonable way to think about growth for Taylor in the upcoming '26 calendar year? Or are there other variables to consider?

Yes, Mike, thank you. Obviously, we haven't -- we're not ready to guide for 2026. But I think as we've implied in our Investment Day and our last couple calls, we continue to expect growth in each of the out years.

Having said that, and I think I said in my comments, we really want to look at the market and make sure that we do the right thing on every single asset. We certainly have the operational capabilities. We have the team to take what the market gives us. But the way we look at new land spend as we continue to prioritize returns is really going to be based on the market.

As you heard from Erik, we still are guiding to something no more than $2.4 billion in land spend. But as we sit here today, I think you give us another quarter to understand how the market is responding. And if we continue to see a reduction in inventory, I think we'll be a lot easier in our next call to talk more about.

[Operator Instructions] Our next question comes from Trevor Allinson from Wolfe Research.

Sheryl, I wanted to follow up on that last comment, thinking about prioritizing price and margin here in the current environment. How should we think about your willingness to slow pace further from here if demand were to remain soft as we enter a seasonally slower coming years? Is there a lower bound on absorption pace that you would not like to dip below if demand were to remain soft?

Yes. I think there's a lot of factors that go into that, Trevor. Obviously, if I think about confidence today, sales are all about confidence and with the consumer in today's environment. It's not really about the financial capabilities of our buyers, Erik pointed out from what we're seeing in our surveys and in the macro data, but we do know the buyers want to deal.

And in some of our assets, that's going to make a lot of sense where we have inventory and we look at the competitive environment in that local submarket. There are some places where we're going to move pace, and there will be a cost to do that. Having said that, there are other assets that honestly, we will be very patient and we're not going to put them on sale.

We have a very strong book of assets. And as we move to our active adult and our move-up buyers, some of those assets in more core locations become very difficult to replace, and we're not going to put those on sale. We've said that structurally, we think our pace should be somewhere long term in the low 3s. Obviously, we saw a little bit of a reduction in our pace in Q2.

There are a couple of reasons. I look at our active adults specifically, and we had a couple Esplanades push out because of power issues that would have had our Esplanade business actually up year-over-year. So there's -- you actually have to peel back the onion to really understand it.

When I look at the combination of our closeouts in the third quarter, which tend to sometimes move a little slower, but then I offset those with some of our openings. That's what gives us confidence in the overall year gives us confidence in our closing and margin guide.

Okay. Sure. That was very helpful. And then switching over to the cost side. A peer of your words yesterday, I was talking about potentially seeing some relief on development costs in your guidance prepared remarks. You all mentioned seeing some softness in the land market. Can you provide more color there? How widespread is that? Any specific markets you're seeing the most relief? And then when do you expect to potentially see some of that benefit start to come through?

Yes. Trevor, Erik here. Yes, I think it's both sides. I think on the acquisition side, that was really what we were alluding to with regard to some softness. And as you think about what that looks like over time, it starts with kind of timing and terms and deals. And then eventually, it works its way into some of the pricing.

And so we have had some success in our underwriting and kind of recalibrating the market and realizing some of that through our acquisition underwriting. We expect that to continue a bit. And really, what we're alluding to is a little bit of a normalization relative to the price inflation that we're seeing in the market. If the long-term trend is something like 10%. That's really been cut in half, you're talking low single digits.

On the development side, similarly, I think because development has slowed to some degree across the markets, you're seeing a little bit more access to trade. You're seeing a little bit greater ability to negotiate on those terms. So again, whatever the long-term trend might be in terms of inflation, think about half of that on the development side. So that's what really what we're seeing.

If you think about everything that's coming through the investment committee, would it be fair to say that a lot of success in structurally negotiating kind of new assets, maybe even assets that are controlled today, price a little harder to get, but we're seeing some success in some specific positions.

Yes, which is kind of the normal train, right? It starts --

As markets.

Yes. And we'll see how long this hesitation in the market last, and if it continues, we'll continue to review every single deal coming through, and we'll ask for something. And in many cases, we'll get it.

Yes.

Our next question comes from Mike Dahl from RBC.

My first question, I just wanted to go back to -- just going back to Trevor's question, maybe trying to put a final point on [indiscernible]. Can you talk about what you've seen in July so far and to the point on pace that are moving pieces, but given the back half is normally seasonally lower, you're just coming off a quarter that was well below normal seasonal trends.

Can you help us understand, like do you think you'll hold pace flattish in the mid-2s? Should we still expect a further drop off? You're closing, you can hit with some of the backlog in specs, but just trying to understand that near-term pace dynamic and [indiscernible] lot of comments.

Yes. As the -- we had a nice finish to June and didn't start a little slower, nice finish. I would say as we rolled into the third quarter, Mike, I mean the holiday, the way it fell on the calendar, I would tell you the first week of the month was slow. We have seen a pickup in traffic and website activity and sales activity had a last week, a nice week.

So early results into the quarter, obviously. But I think our perspective on managing price and pace on a community-by-community asset holds, which -- and with our community openings, I like to think we'll be somewhere in a similar place.

If I look historically, generally, we do see a falloff from Q2 to Q3. We also expect early August, you start getting some normalcy back into the seasonality with kids back in school and normalized activity. But a little early to comment on kind of the macro of August and September.

Okay. Fair enough. And just sticking with the price versus pace dynamic. I mean, it makes sense. I hear what you're saying, your order ASP was still down quite a bit. I assume some of that is mix related, but when we think about the order ASP and how you're managing that pace versus price dynamics? Any color on whether that side should start to stabilize a little bit as we were down 5% quarter-on-quarter, 6% year-on-year? Any help on that would be good.

I mean Curt shared kind of our expectations for price for the balance of the year, but you're absolutely right. It was -- even though it was a little bit ahead of our guidance, it really was a mix issue and both a geographic mix issue as well as a spec penetration as much as anything.

Mike, remember that we have made some comments that we've got inventory more universally across all consumer groups. But the majority of that inventory is always going to address that first-time buyer, and that's just at a lower price point. Even when I look at the active adult penetration, specifically a couple of positions in Florida, Sarasota specifically, we had some strong townhome penetrations, which at a lower price than our normal resort lifestyle or Esplanade.

So not just one thing, but I think all of those contributed to the overall price is and then Indy, you have that's really fair, Curt. We had a full quarter of Indy, which is primarily Indianapolis, which is primarily a first-time buyer market for us so far. And we think about last year, we had 9 weeks in the quarter. This year, we had a full quarter of that penetration. Good news is when I look at the Indianapolis results, their pace doubled year-over-year. So good -- it's a good result, but it absolutely is going to have an impact on the ASP.

Next question comes from Alan Ratner from Zelman & Associates.

First question on the cancellation rate. I know -- I don't want to make a [ mountain out of a mole hill ] here because it's still a pretty healthy level. But you did flag it as kind of something that was a bit of a downward surprise in the quarter and up year-over-year.

I was just curious if you can give a little bit more color on the cancellations because I know you guys take a pretty hefty deposit and generally with the build-to-order business, although shrinking that tends to mitigate some of the cancellations. So at what stage are you seeing these cans, at what price point market specifics? Maybe any additional color you can get to understand what's driving that would be great.

Yes. It's a really fair question. We did highlight it, Alan. It's hard to find a company-wide trend. Let me start there. Actually, where I'll start is you're absolutely right. When you look at our can rate, it's -- I think the flag is it's up quarter-over-quarter a little higher than we've seen in a couple of years, right? But still, as far as the industry goes, I would say, honestly, slight low.

When I look across the regions, you'll see relatively consistent maybe central being down just a bit. If I were to point to the most prevalent -- it actually wasn't getting financed. It was actually in a number of situations. It was a home to close that maybe fell out a home to sell that maybe we pushed out a contract because they didn't sell it, and we're not going to sit on inventory.

We had some situations with reloads changing. We had some situations. We're honestly a buyer was in contract for a little bit longer and then they across the street, find a ridiculous deal of an incentive, and it's easy to walk away from the deposit. But there wasn't one, I would say, obvious trend across the entire portfolio.

And as I said, if I had to point to one, it would probably be on their existing home. And when you think about our move-up buyer, most of them need to sell their existing home, but not all of them.

That's really helpful. And I have a separate question, but hoping to squeeze a quick follow-up on that point. In that circumstance, where somebody is in contract and can't sell their existing house, do you guys keep the deposit?

Generally, yes. It depends on when did they write it as a contingency. We only take a certain number of contingencies by community. If we're going to take a contingency, we're going to really scrub their existing listing and understanding how they positioned it in the marketplace. Sometimes they'll have a 30-day contingency and then that gets released.

So I would say, unless it falls within the -- I mean, if it doesn't fall within the guidelines, we do keep the deposit, and we have a pretty black and white line on that. Actually, the only thing I'd add to that is we do [ incent ] them, Alan, to come back within 12 months, and we'll reapply the deposit, but we would keep it.

That makes sense. All right. Second question, I guess, circling back to 26, and I know you're not going to give any guidance there, and I'm not looking forward. But I'm just curious if you think about the guidance for the remainder of this year. Obviously, a lot of these closings are coming from your spec inventory.

So your backlog today is down about 30% year-over-year. It's probably going to end the year in a pretty similar spot, assuming the mix of business stays elevated at specs. So you flagged, you're pulling back on starts right now, which I understand. But as you think about next year's spring selling season, is there a point where assuming you're successful in clearing through these specs and delivering the closing guidance? Is there a point where you're going to look at your start pace and say, we really need to reaccelerate things if we want to show growth in '26?

Yes. It's all going to be dependent on market conditions, Alan. But of course, I mean, we're going to really be focused also with our new Esplanade openings and some of our new move-up positions to where it's possible to accelerate our to-be-built business, right, because that's generally what we come into the new year with a strong to-be-built backlog. So that will continue to be a priority for the business.

But then as we move through these specs, we absolutely will replace them. We'll do them in the right locations where the consumer wants inventory. But we have to make sure that the consumer -- that they're in the right places and understand kind of the macro.

But given today's environment, if I were to look at what we're looking at today based on consumer feedback, with the priority or preference being inventory, we will continue to replace them, but at a -- I'd say, a very responsible rate.

[Operator Instructions] Our next question comes from Rafe Jadrosich of Bank of America.

I wanted to -- you spoke about the absorption pace on the move up versus entry level versus resort lifestyle. Can you talk about the margins or incentives by segments? Have you seen any changes there?

Yes. I would say that when you think about incentives, the way I would look at it is we can certainly talk about it by [ consider], but your most expensive incentives are going to go with finished inventory because that's probably where we will focus on forward commitments and those permanent buydowns.

We've talked in the past about our [ buy, build ] and some of our other proprietary programs where on a to-be-built or an earlier spec, where we can assure a consumer a below market rate. Those aren't quite as expensive.

The only thing that I would point out is somewhat different from the norm is with the resort lifestyle buyer, many of them don't take mortgages or they take very small ones. So our incentives there might be more focused on a percentage of options that they buy or if they buy this many will give them a percentage off. But that would really be the exception. And generally, as we've talked about, everything else is really tailoring that right promotion, but the further you get down to a completed inventory home, the more expensive your incentive is.

Okay. That's helpful. And then when we look at the third quarter back half margin guidance relative to where you were in the second quarter, can you just between the higher incentive level and mix impact -- can you sort of give us some color on each of those pieces, maybe like how much of the step down is from each of those?

Yes, Rafe, I would say that the majority of it is going to be on the spec penetration and maybe some mix. But as we alluded to kind of in our prepared comments, most of it is predicated on kind of the increase of our spec penetration that is resulting in kind of in that kind of step down from a margin standpoint.

A minimal impact from a mix perspective. We are seeing a little bit higher sales price mix for the rest of the year with some higher-priced communities kind of getting closings or increased closings in kind of our Western segment. but most of it is going to be as a result of the increase in our spec penetration and the resulting incentives associated with that.

And we've assumed relatively stable incentives, right? As interest rates were going to remain generally where they are now.

Next question comes from Ken Zener from Seaport Research Partners.

I wonder, the Florida buyers, I know you guys, obviously, with your Investor Day, spent a lot of time down there. I ask the same question to [ hotel ] yesterday. But like what percent of those active adult buyers in Florida for those homes are generally from Florida, if you could book that out a little bit. Your active [indiscernible] buyers in Florida mostly from United States or [indiscernible] --

Yes, it depends a little bit. It's a big state. So it's interesting, if you go all the way down to Naples, it's historically been as high as 80% over time. And conversely, if you go to up north, it's something that's going to be closer to 40%, 50%, still a lot and noticeable, but it does depend.

And it's also seasonal, right? If it's the season, majority of our buyers are hey, but as you move through like the summer months and kind of shoulder, you tend to have a more in-state buyer. So having listened to the call yesterday, Ken, I would agree with what you heard yesterday and our Florida buyers come from all over, West Coast, internationally, East Coast, there's a lot -- I mean there's a lot of desire to live in Florida and across the state. So we continue to be quite bullish on Florida.

Excellent. And then if you could -- and I apologize, I should know this, but when you say spec 71%, can you define spec, is that intra-quarter order closing? And how does that 71% compared to last quarter and a year ago quarter?

Yes. The 71% Ken, was the percentage of spec sales in the quarter. I think a year ago, -- that was probably in the -- just checking my notes, something closer probably in the, what I would say, in the mid-60s.

So that was higher. And then our penetration -- I'm sorry, Ken. So that was higher as well as our penetration of what we sold closed in the quarter. So they were both a bit higher than, I would say, historical norms.

Yes. Ken, I found it here. Actually, a year ago, the percentage of our spec sales in the quarter were right around 59%.

Great. And then is that -- how is that different than intra-quarter orders that we're closing because that's traditionally how I think about spec. What is that metric if you have that available?

Yes, the percentage of our specs that sold and closed in the quarter was 28% which again is higher than where we've been historically as well.

Our next question comes from Jay McCanless from Wedbush.

Great. So 3 questions for me. The East orders performed much better on a comparison basis versus the company average. I guess -- could you talk about what you're seeing in Florida and also in Atlanta. I know that's an important market for you guys.

Yes. Certainly, Ken. As I said, I talked a little bit already, I think, about Esplanade. If I start with kind of the Southeast, Jay, that remained quite strong throughout the quarter. We saw year-over-year sales improvement in our Carolina and Atlanta markets. I've already talked a little bit about Indy.

When I moved to Florida, it's a little bit of a mixed story. Our Orlando business, which is our largest Florida business had a nice year-over-year increase in sales. And that was fueled by some community count growth and a very modest reduction in pace.

But I think most importantly, when I think about Orlando, it's their mix of communities is really shifting from what we've had the last year or 2 to a more balanced book of consumer groups away from just exclusively first-time buyers, which will continue to improve sales, margins and returns. Sarasota also saw a nice improvement in pace, and I think did a nice job reducing their inventory.

But as I mentioned before, we saw a pretty count home penetration in Esplanade, which is unusual for us, but it did moderate their ASP and brought down even as high as our upgrades were brought down the typical upgrades for the quarter.

I guess before I leave Sarasota, I did mention that we had that new Esplanade opening with just a great interest [indiscernible] in Q3. So that we had planned to open last quarter. So very excited about that when I look at the interest.

Jacks also had a nice sales growth from both community count and pace expansion. You can hear a trend here. We're also very excited to open our first Esplanade there in St. Mary's, and that will be in the first quarter. That one also has a nice interest list.

And then I would tell you, Tampa was probably the only market where we saw some real softness in the quarter in our paces. We saw higher cans than normal, and that was predominantly in our first-time buyer. Good news is across the state, Jay, we saw resell inventory month of supplies reduced in almost all our markets.

And then shifting out West. We heard from a couple of your competitors yesterday that [ NorCal ] especially maybe seeing some tech job loss or some tech job concerns. Maybe what are you hearing from the field out there? And how are you thinking about that? Because I think a community mix is pretty even between NorCal and SoCal, but anything you can give us on both those areas would be appreciated.

Yes. For us, I'd say a little different. I mean we've been talking with The Street with you Jay for a while about lightening our capital investment, particularly in SoCal and reducing our community exposure. So the communities that we have in SoCal, I would tell you, are performing well above the company average on absorption.

But the fact that community count down, which was quite intentional as we reallocated funds to other markets, it has created some drag on total sales in the West. If I head up to Northern Cal, I would describe Sacramento as stable with relatively consistent community and paces.

Our Bay business was flat on sales year-over-year. It's interesting because our cans in the Bay, and maybe this goes back to one of the earlier questions I got, we're actually below the company average, even with all the tech noise we're seeing, and I would tell you, have moderated quite a bit since the back half of last year. So for us, the base sales only being flat had to do with open communities.

We have 3 new communities that just opened at the end of the quarter. I'm excited about those because that will help grow the balance of the year. It's our only market with an ASP over $1 million. So you would expect some cautiousness with their equity in the -- in a tech market like that. But honestly, it's been pretty good overall.

And then I thought it was pretty interesting the shopper surveys you talked about in your prepared comments, Sheryl. I mean I think the bottom line from that is the average TM consumer is looking at a house their financial situation is in pretty good shape, but it's more the macro that's [ scaring ] them at this point. Is that the bottom line takeaway we need to have from that?

Perfect summary. You're dealing with this move-up, active adult buyer. Jay, you're moving -- you're talking about a more sophisticated consumer. So the fact that they want to make sure they're getting the right deal compared to the marketplace, the fact that they're going to be a little bit more cautious and understand how the macro affects them, I think makes a lot of sense.

They have the financial wherewithal. It's not that that's holding them the ones that are kind of sitting on the sidelines, would you read any other specifics in the research area that you point to?

No, it's really interesting. And I think it circles back to kind of the interest in specs and looking for incentives too. The thing it's all tied together, and it's really sentiment. And so again, rightly or wrongly in the prepared remarks, we framed that as a positive because it's much more difficult to fix your financial situation than it is at least that's something that you don't it's really about the newspaper and the sentiment that seems to be impacting people's desire to be out shopping.

And we'll see in some time, Jay, what happens. But I would point to the big beautiful bill and some of the benefits with the salt deduction cap temporary lifted, the permanence of the $750 million on mortgage interest that now won't expire. I think some of those things will help the consumer. I think all of that's kind of been up in the air for a while.

Obviously, the mortgage insurance deductions, I think that will be more focused to the entry-level buyer. But I think all of those things, as all of this kind of is put to bed, I think and gets understood by the consumer and then some confidence in what's going to happen with rates. I think all of this begins to play a part for them.

So since you brought it up, I'm going to go ahead and ask. I was going to ask this question probably next call -- next quarter's call, but do you all look to see with this increase on the [ salt ] cap, how much it might help people? I figured everyone's going to be talking about it looking at it, but since you all brought it up early, I figured I'll go ahead and ask now.

Yes. I think we -- at this point, I don't think I can quantify it for you for us. It's really California, that's going to be impacted, right? Mostly it's absolutely going to have a benefit. I think the benefit goes to your last question, though, it really does come around confidence. They're not going to make a purchase decision because of the salt cap.

But having that, I think, in the formula helps them. We're looking at it on an overall price point. If you look at the Bay price I just talked about with the overall ASP at $1 million, it's certainly going to create a benefit. I don't think it's what gets them over some of the confidence issues they're dealing with, but I think it's helpful.

Absolutely. I think probably for Texas as well as some of the higher price homes you sell them there because people forget that Texas is a relatively high property tax market. So yes, I'll definitely ask you about it. I think it's going to be good for your all's business and in the industry.

Thank you very much. We currently have no further questions. So I'd like to hand back to Sheryl Palmer for any further remarks.

Thank you all for joining us today. I know we went a little long. I appreciate all the questions. Everyone, take care, and we look forward to talking to you next quarter.

As we conclude today's call, we'd like to thank everyone for joining. You may now disconnect your lines.