Welcome to today's Taylor Morrison Home Corp Earnings Webcast and Conference Call. My name is Drew, and I'll be coordinating your call today. I'm now going to hand over to Mackenzie Aron, Vice President, Investor Relations to begin. 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 that are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at www.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 today is Lou Steffens, our Chief Financial Officer and Erik Heuser, our Chief Corporate Operations Officer. As always, I will share our quarterly highlights, as well as an update on the market environment and how we are navigating and positioning the company for success. After my remarks, Erik will discuss our healthy land portfolio that remains a source of long-term value, while Lou will provide a detailed review of our financial results. I am pleased to share that our team once again delivered record profitability metrics this quarter, including new highs for home closings gross margin, earnings per share, and return on equity. We achieved these results, despite the continued affordability and supply chain challenges facing our industry, as well as the significant impacts from Hurricane Ian. Most importantly, our team members and residents came through the storm safely, and most of our communities and homes under construction did not suffer any damage. However, the abundance of preparation in our storm protocols, as well as the recovery and cleanup needs following the storms reduced our volume of home closings and sales in our Florida and Carolina market. We expect the extensive damage and renovation needs will add further complexity to an already challenged supply chain and have impacts on both construction and development for the next many months, which Lou will discuss in greater detail. Nevertheless, our teams delivered 3,050 homes at a record home closings gross margin of 27.5% and an all-time low SG&A ratio of 7.4%. These results drove a more than 100% increase in our earnings per diluted share to a new company high of $2.72. In addition, during the quarter, we strengthened our capital flexibility through a successful expansion of our corporate revolving credit facility to $1 billion and took steps to further reduce debt outstanding, leaving us on track to reach a net debt to capitalization ratio in the mid-20% range by year end. At the same time, we continue to invest in our shares outstanding with repurchases of $105 million during the quarter. In total, these strong earnings and our disciplined balance sheet management more than doubled our return on equity to 26% from 13% a year ago. Turning to the market. As I shared on last quarter's call, we have begun to see shoppers cautiously reengaging with our sales teams and online tools in July, albeit from abnormally low levels in June. This translated into sequential improvement in net sales orders in July and August. However, activity slowed again in September alongside a reacceleration in interest rates. In total, we recorded 2,069 net sales orders, which represented a monthly absorption pace of 2.1 net orders per community, both of which were down sharply from a year ago. The slowdown has been felt across our wide range of price points, geographies, and consumer groups. Consistent with trends in the second quarter, our first and second move-up segment, which accounted for the majority of the quarter's net sales has been the most resilient with particular strength in the Southeast. Within our resort lifestyle business, we experienced pullback in demand as these savvy consumers have taken a wait-and-see approach to their purchasing decisions and the market volatility, although cancellations are the lowest in this segment, due to their significant financial strength and emotional attachment to their homes. It is also worth noting that our resort lifestyle business is highly concentrated in Florida, so it was most impacted from a sales perspective by Hurricane Ian at the end of the quarter and into October. Lastly, our entry-level communities continue to face the most pressure as we would expect given the greatest affordability constraints among these buyers. However, we are still seeing healthy traffic activity at these lower price points and are working diligently on qualification solutions. Generally speaking, higher mortgage rates and uncertainties surrounding the economy have pushed many potential homebuyers in all consumer cohorts to the sidelines and we continue to believe it will take some time for the market to find its new equilibrium as interest rates have most recently reached as high as 8%. This will require stabilization in pricing as much as an improvement in consumer confidence and buyer psychology, led by clarity in the Federal Reserve's strategy. Accordingly, our approach remains grounded in our prudent and long-term view of the business. Our playbook is simple: to position ourselves to be opportunistic by balancing pace and price, maintaining healthy inventory levels, and preserving our capital. Let me share the guiding priorities we are focused on. First, as Erik and Lou will elaborate on, we have adjusted our capital allocation to reflect the evolving market conditions by pulling back on land investment and prioritizing the health of our balance sheet. We control an attractive land portfolio, the majority of which was contracted more than two years ago. Second, we will prudently manage our starts pace as evidenced by the moderation in our monthly starts to 1.5 homes per community during the quarter from 3.5 a year ago. At quarter end our inventory remained healthy with just over 2,500 unsold homes under construction of which 0.5 per community were finished. Additionally, our teams are engaged with our suppliers and trade partners to reduce costs and rationalize expenses to current market conditions with success likely to be based on each market's total starts activity. The rationalization of our operating structure, options, SKUs and floor plans over the last couple of years has greatly streamlined our business for improved efficiency and we will continue to press ahead on production-oriented opportunities and our teams are in a position with additional permits on hand should the market shift as we expect it will in time. Lastly, on the sales floor, we will responsibly respond to market pricing and competitive pressures to meet acceptable sales paces, while also protecting the value of our communities and backlog. As market conditions evolve, we are offering compelling incentives and adjusting pricing to recalibrate affordability and stimulate demand as needed on an asset-by-asset basis, appreciating each community's inventory duration, competitive dynamics, and targeted consumer group. In new communities and those with small backlogs, we have aggressively sought to find market with our pricing strategies, while taking a more conservative approach in longer-dated existing communities. Combined, these pricing adjustments and incentives have averaged mid to high single digits. As I emphasize on last quarter's call, we strongly believe in the value of using finance as a sales tool by offering generous market incentives versus simply reducing price as the benefits to the buyer is often much greater. This includes a range of tools offered by Taylor Morrison Home Funding, including permanent and temporary interest rate buy-downs, extended rate locks, and various financing programs. For many borrowers, the interest rates provided by Taylor Morrison Home Funding are more competitive than what is available broadly in the market, and our team provides solutions tailored to each of our unique buyer circumstances to maximize the monthly payment savings and overcome cash out of pocket obstacles. In addition to helping drive sales with new buyers, our mortgage team has been diligent in working with our backlog customers to lock in their interest rates and secure mortgage qualification. Let me share a little more about what we experienced with our backlog during the third quarter. At quarter end, our backlog of over 7,900 sold homes was backed by average deposits of nearly 10% or over $66,000 per home. Approximately 60% of our buyers in backlog purchased to-be-built homes that they designed to meet their lifestyle needs. The emotional attachment to these personalized homes cannot be overstated as nearly 95% of our third quarter cancellations were for spec homes, the majority of which were sold earlier this year. These factors have helped limit the extent of our cancellations, which increased modestly but remained historically low at 4.3% of our opening backlog versus our long-term average of approximately 7%. These cancellations equated to 15.6% of gross orders although we believe this metric is less informative at current depressed sales levels. As I always share, our buyers tend to be highly qualified and financially secure. In the third quarter, our homebuyers using Taylor Morrison Home Funding continued to display prime credit metrics, including an average credit score of 752 and a down payment of 23%. Additionally, a high teen share of our buyers used all cash to purchase their home, up from a mid-teen share a year ago. The vast majority of our buyers have the financial flexibility to absorb higher monthly payments from a purely mortgage qualification perspective, based on the meaningful interest rate cushions, I have previously reported that once again remain relatively consistent at healthy levels in the third quarter. As a result, it is not surprising that our recent consumer survey feedback indicates that many of our customers are waiting for visibility on pricing trends, the economy, or their own financial situation before moving forward with a desired home purchase. On the topic of pricing and even more prevalent today transparency around pricing, I'm delighted to share that we recently unveiled an enhanced end-to-end digital reservation system for to-be-built homes in our first community in Florida. You may recall, we led the industry's pursuit of digital innovation by being the first homebuilder to launch a reservation system in March of 2021, and now have further cemented ourselves as the leader in this space by self-developing technology that gives home shoppers the ability to build a new home entirely online and then reserve the configuration with a small deposit. Aligned with our commitment to help consumers make informed choices the reservation system shows an estimated purchase price and monthly payment, both of which update as each selection is made throughout the process. Before placing the reservation on the home they digitally built, customers can go into their shopping cart and review an itemized list totaling their selection and can adjust based on their desired budget. During the third quarter, our spec and to-be-built online reservations had a sales conversion rate of approximately 40% and accounted for 13% of our company sales. There is so much worth sharing as we look at the data trends of our last quarter reservations, but a particular unexpected favorite is the consumer mix. We would have expected to see high take up with our millennial shoppers, and although they do have a slight lead in total reservations, we actually have a fairly consistent mix between millennials, Gen Z, and even baby boomers. Innovation is core to Taylor Morrison and we know that proactively responding to evolving customer behaviors and interest is simply good business. Now, I will turn the call over to Erik to discuss our healthy land portfolio and the conservative stance we are taking for new land spend.

Thanks, Sheryl, and good morning, everyone. As we have shared in our last several calls, we have taken an opportunistic approach to land investment over the last two years, as we intentionally and prudently dialed back our land fund following our well-timed acquisition of William Lyon Homes in 2022, which added significant depth and breadth to our portfolio prior to the significant run-up in land pricing. As a result, we have been highly selective in new land spend and have remained disciplined to our long-held mantra in investing in prime locations in core submarkets with proximity to job centers, schools, hospitals, and other desirable amenities, all of which are attributes that have historically contributed to more stable land values over time. This opportunistic approach became even more conservative over the last several quarters to ensure that each dollar invested meets our stress-tested risk-adjusted return thresholds. As a result, still over 60% of our own lots were contracted for in 2020 or earlier with a weighted average vintage of four years. We began stress-testing every deal in 2021, have recently reassessed every deal in our pipeline, and are re-reviewing each land transaction prior to final closing. For deals in process, we are leveraging our strong relationships with land sellers to renegotiate timing, terms, and/or price as appropriate. In fact, for the third quarter, 80% of our contemplated core business land spend progressing through the investment committee was restructured or terminated when underwriting no longer met our required thresholds. This resulted in $7.4 million of pre-acquisition walkaway expenses during the quarter. This highly scrutinizing approach was evident in the nearly 70% year-over-year decline in our third quarter spend on new homebuilding land acquisitions to $102 million, the lowest level since 2016. On the other hand, development-related spend was up over 80% from a year ago and accounted for 73% of total land investment. While we are closely scrutinizing development plans for both new and existing projects, with an eye on managing overall lot inventory, we continue to have meaningful opportunity to monetize our well-vintage land and maintain competitive scale and positioning across our markets. As we prioritize our balance sheet and cash generation in the current market environment, we recently completed an exhaustive capital allocation review during which we closely evaluated each of our division's land acquisition and development budgets and further reduced approved spend relative to our prior forecast. In total, we now expect to spend approximately $1.8 billion in total land investment for the year with a strong bias towards development. At quarter end, we owned and controlled approximately 80,000 homebuilding lots, which represented 6.1 years of total supply. Of these lots, we controlled 42% via options and other off-balance sheet structures that enhance capital efficiency and reduce risk. This all-time high percentage was up from 36% a year ago. Our years of owned lot supply appropriately moderated to 3.5 years from 4.0 a year ago. Our landlighter investment approach balances cost of capital with expected returns to determine the optimal financing structure for each investment, and we are pleased with the mix of our land portfolio, both from an owned and controlled perspective, as well as the age and composition of our lots. Finally, let me share a quick update on our Build-to-Rent operations. During the quarter, we contracted our first project sale—a horizontal apartment community in Phoenix secured by a meaningful deposit. This transaction will mark an important milestone in the evolution of our Build-to-Rent business, and we look forward to providing more details upon its closing. With that, I will turn the call to Lou to discuss the company's financial performance.

Thanks, Erik, and good morning everyone. In the third quarter, we generated earnings per share of $2.72, which was up 103% year-over-year, due to strong revenue growth, significant improvement in our home closings gross margin, strong SG&A leverage, and a 10% lower share count. We delivered 3,050 homes at an average selling price of $650,000, which generated home closings revenue of $2 billion. This was up 12% year-over-year, but was slightly below our guidance range due primarily to the impact on production and closings from Hurricane Ian. During the quarter, our cycle times extended modestly with trade labor being the most common constraint across the country. Municipality inspections, meters, and flooring also continue to be challenges. While we are beginning to see encouraging signs at the front end of the construction timeline, we do not expect to see back-end construction cycle time improvements until later in 2023. Additionally, based on our experience from Hurricane Harvey in 2017, it will take several months before we gain visibility on construction and land development timelines in Florida, which accounted for nearly 25% of our closings in the first half of the year. These impacts include disruptions in trade labor availability, delays with construction and development timelines, and limited availability on municipality inspections and approvals as repair and recovery efforts are prioritized over new construction. Combined with ongoing supply chain challenges, these uncertainties limit our near-term visibility at closings, and therefore we are not providing fourth quarter operational guidance. Turning to margins, our home closings gross margin for the quarter was 27.5%, which was up 630 basis points from a year ago and 90 basis points sequentially. This company record margin highlights the operational enhancements we have achieved since fully integrating and optimizing our acquisitions, as well as robust pricing power captured in prior quarters, which more than offset cost inflation. SG&A as a percentage of home closings revenue was 7.4%, which was down 210 basis points year-over-year and marked the lowest level in our history. Now to community count, we ended the quarter with 326 communities, which was just slightly ahead of our prior guidance range due to fewer community closeouts. Turning to our balance sheet. Our capital position remains strong with approximately $1.4 billion of liquidity at quarter end, including $329 million of unrestricted cash and $1.1 billion of capacity at our revolving credit facilities, which were undrawn outside of normal letters of credit. During the quarter, we increased the aggregate commitment available under our corporate revolving credit facility from $800 million to $1 billion. In addition, we issued a notice of redemption on our 5.875% 2023 senior notes, which will allow us to reduce our gross debt by the full outstanding principal amount of $350 million on October 31. Following this transaction, we will have no debt maturities until 2024. As a reminder, in the second quarter we retired $265 million of 6.625% 2027 senior notes through a successful tender offer. Collectively, these actions will enhance future gross margins by reducing capitalized interest and align our gross debt closer to targeted levels. Our net debt to capitalization ratio equaled 34%, down from 41.1% a year ago, and we continue to expect to reduce our net debt leverage to the mid-20% range by year-end. Lastly, we repurchased 4.2 million shares outstanding for $105 million at an average share price of $24.92. This represented approximately 4% of the prior quarter's diluted share count. Year-to-date, we have purchased a total of 12.9 million shares for $335 million offsetting our diluted share count by approximately 11% since year-end, which we believe is an attractive and accretive use of our capital, given our undervalued stock price that is significantly below our current and expected book value. At quarter end, we had $320 million remaining on our repurchase authorization. To wrap up, let me reiterate that we believe we are well positioned operationally and financially to navigate the current market environment and uncertainty ahead. Our capital allocation priorities are based on a disciplined framework that balances our operational and growth objectives with the health of our balance sheet as we seek to generate attractive returns for our shareholders. Now let me turn the call back over to Sheryl.

Thank you, Lou. Let me emphasize that our strong third quarter and year-to-date results reflect the enhanced profitability and overall business effectiveness that we achieved through our unrelenting focus on operational excellence, scale synergies and disciplined land investment. These internal initiatives and our successful M&A strategy have positioned our company to be resilient and nimble. In addition, our land portfolio is comprised of well-underwritten, well-located land parcels contracted at an attractive low cost basis. Additionally, our gross margins, bottom line earnings and returns are at the highest levels in our company's history and our balance sheet is strong with significant liquidity. Lastly, our seasoned leadership and skilled operators have navigated prior cycles and are well equipped to guide our company through today's market headwinds. In short, we have never been better positioned to weather the dynamics reshaping housing as the Federal Reserve continues its aggressive fight against inflation. To close, I'd like to thank our homebuilding and mortgage teams across the country for another quarter of record performance despite the odds. They are laser-focused on year-end goals and actively working with our homebuyers in today's challenging environment, and I am so appreciative of all of their efforts. With that, let's open the call to your questions. Operator, please provide our participants with instructions.

Thank you. We will now begin today's Q&A session. Our first question comes from Carl Reichardt from BTIG. Your line is now open.

Thanks very much. Good morning, everybody. I wanted to ask a little bit about base price cuts, Sheryl. Are you going into your backlog on BTO product where you're cutting bases and giving them new price? Or how are you managing your backlog where you've got long dated communities BTO product that's going to take a while to get out the door, especially given the supply constraints you're seeing?

Good morning, Carl. Thanks, good question. I did not want to answer that with span the entire portfolio. I think as we discussed last quarter, we took very early action to proactively reach out to our backlog. We had to make decisions community by community, as you can imagine, given time and backlog, the competitive environment, the deposits that we held, we looked at it all differently. Generally, I would say what we did with backlog, I'd say the 95% rule would be that we assisted them with financial incentives to help them lock a loan that mitigated the change they've seen in the interest rate from when they had gone into contract. When I look across the quarter, we spent somewhere around 15 basis points or 16 basis points across the entire portfolio of Q3 closings to protect backlog. It was generally around 2% of loan amount, maybe just over 1.5% of sales price. The deals that actually affected the backlog, but as I said, very strategic in how we approached them. I think if I look at the quarter and the ones that actually impacted the quarter was about 8%, as we look at all the characteristics of timing, pricing, deposits, all those things.

Great. Thank you, Sheryl, I really appreciate that detail. And then just on Ian's impact, again, I'm looking at what you produce versus your guide and it seems like 150, 350 homes or so were impacted if you'd gotten to your guidance range. Is that roughly right? And then can you talk a little bit about maybe how orders have worked in some important market in Florida? And while it's hard to get homes built, are you seeing some return of traffic to those markets that were impacted by the hurricane? And do you expect maybe some opportunities to sell more houses in Q4, because you had a gap where you couldn't sell? Thanks.

Thanks, Carl. Yes, I feel coming out of the hurricane, honestly we were quite fortunate. It was a very difficult couple of weeks for the teams. Our protocols started, you know, probably late the week of the 20th and then obviously continued into the last week of the month. So we generally shutdown have a pretty good cadence around our storm protocols, which honestly protected our communities and our teams. When I look at the damages, Carl, just to hit that as well, you know, we had just under 500 houses. I wouldn't call it damage, but I would say that we're affected with insulation, drywall, house wrap, landscaping, really just the tremendous impact of that kind of horizontal rain. We probably thought two weeks in the quarter, the week of the 19th, 20th and the following week where we really were shut down for traffic. So certainly that affected our units, our paces, and probably the greatest impact as we mentioned on our active adult consumer, because that's a good chunk of our Florida business certainly enables for Myers and Sarasota where we were most impacted. We’ve returned to a normal business cadence that took the municipalities a while to get back. I'd say it was late the second week before they really came back to real business. So we are seeing a move up in traffic. At the same time, we're starting to move into that shoulder season for the active adult. So I don't think that will keep them away. I think, as you said, probably some new opportunities. But it's hard for me to talk about the hurricane without just tremendous call out to our teams, because what they were able to overcome helping not to start communities, but our homeowners and then our team members across the state the way they showed up in Naples and Sarasota was just so impressive. Hope that helps, Carl.

It does. Thanks, I really appreciate that, Sheryl. Thank you.

Our next question today comes from Matthew Bouley from Barclays. Please go ahead.

Hello? You have Elizabeth Langan on for Matt today. Thank you for taking the questions. Just to kind of start off, how should we be thinking about incentives going forward? And what do you think the magnitude could be that they could reach? And how does that kind of balance with potential price cuts and kind of finding that equilibrium that spurs demand?

Thank you, Elizabeth, for your question. It’s a valuable inquiry with several aspects to consider. Our focus regarding incentives, as we've discussed over the past quarters, is primarily on understanding consumer needs. Now appears to be a critical moment for our industry to unite and establish a sensible approach to navigating this unsettling environment. We need to utilize tools that truly benefit individual consumers. Our team has been working hard to discern what supports each consumer because simply lowering prices isn’t effective. As prices decrease, consumer expectations tend to rise. Therefore, this is a period where we will emphasize delivering value and leveraging our resources. We will continue to prioritize finance as a sales tool because, as we've mentioned previously, the two main concerns for our customers are assistance with monthly payments and help with cash to close. Using finance as a sales tool can enhance our effectiveness, allowing us to operate two to three times more efficiently than if we were only reducing prices. However, we must also respond to pricing pressures due to inventory accumulation in our market. Thus, our approach will involve a combination of strategies. In my earlier comments, I noted the potential impact of using finance, alongside incentives for promotional homes or special options, as well as any necessary adjustments to base pricing. Currently, we anticipate adjustments in the mid to high single digits, varying by community, with some requiring more and others less effort. Our goal is to find the right traction needed to stimulate activity in each of our communities.

Thank you so much. That's really helpful. And in terms of switching, I guess, touching on the affordability pressures. Could you talk a little bit about what you're seeing in different regions, like maybe specifically in Phoenix and Austin? If those areas are seeing more pronounced price pressures relative to others?

Yes. We can discuss what we're observing across the business. Generally, Florida and the Southeast appear to be performing the best. Despite the disruption caused by Hurricane Ian, these regions are experiencing the highest paces and the lowest can counts. However, they are also facing some of the greatest production challenges, except possibly for Phoenix. Texas seems to be doing reasonably well overall, but, as you mentioned, conditions vary by market. Austin has experienced the largest increase in prices and has significant inventory being produced. This area also includes lower price points, which have led to the greatest number of cans. In the West, we initially observed pressures similar to Phoenix and Austin, where we've seen some of the highest price increases, putting pressure on can counts. Consumer behavior varies across the country; for example, in some markets, active adult segments are performing strongly, while in others like California, it is noticeably weaker. In Houston, our affordable consumer segment is showing strength, but qualifying them requires significant effort. In Austin, however, our market leads at higher prices, as the affordable consumer segment is struggling more. Notably, Charlotte and Atlanta deserve mention as the two markets where we've seen improvements in year-over-year paces. Overall, all of our Southeast markets have can rates significantly below the company average.

I think it's fair to share that markets like Phoenix and Austin have been positively impacted. The dynamics of affordability have shifted over time mainly due to positive migrations and the influence of corporate relocations, along with some encouraging migration trends we've witnessed.

Yes. No, I think that's right on, Erik. I think the bottom line is we can't paint even any market with a single brush, right? It really does come down to submarket and community-by-community strategy to take a deep dive so that we can optimize those positions.

Thank you so much.

Our next question today comes from Alan Ratner from Zelman and Associates. Your line is now open.

Hey guys, good morning. Thanks as always for the great information. Appreciate it.

Good morning.

First question, I don't think you have covered this in much detail yet, but it's quite impressive to see such a significant reduction in G&A expense this quarter. It had been around $70 million per quarter for as long as I can remember, and now it has dropped to the low $50s. I am curious if there was a specific reason for this reduction this quarter and how sustainable you believe this trend will be moving forward.

Yes. Good morning, Alan. This is Lou. I would say our strong average selling price for the quarter, which was $650,000, really gave us significant leverage. Although I expect pricing to decrease a bit over time, we will begin to see increases in advertising and broker co-op, which will bring that level back up to more normalized levels. Therefore, there is nothing specific to highlight, but I think really the

The G&A part you're mentioning—wouldn't the numbers you're referring to flow through the SG&A line? I'm focusing on the general administrative costs, which I believe are usually more fixed unless I'm wrong?

It is, but driven by the ASP, you're going to see better leverage for the quarter.

Yes, the percentage is clearly levered. Regarding costs, there’s not much specific to mention.

Yes.

The actual 50, I don't know that there was one specific item Lou that. It was really just, I think, cost controls across the board.

Yes. I'd say, yes, nothing super specific. Some probably true-ups are different accruals here and there, but nothing material on one item.

Okay. Well, certainly, if that's sustainable, that would be, yes, certainly very encouraging as revenue potentially comes lower. Second question, I'd love to jump in a little bit to the land disclosures that you guys have been providing just in terms of the vintage of your land and it sounds like you guys have taken a pretty sharp pencil to your whole portfolio and kind of thinking through the future land spend there, as well as what you currently control. So I think, Sheryl, you mentioned that 60% of your own land are 2020 or earlier vintage. So as you kind of re-underwrote all of your land and maybe look at the 40% that has been purchased over the last two years, what are the implied returns and margins on those assets today given the new price that's down mid to high single-digits on a net basis as you described?

I think I'll let Erik run with that one, Alan.

Hey, Alan. How are you?

Hey, good. Erik?

Good. Yes, so you know, generally, we've been underwriting under recent reporting levels as you think about gross margin. And as we've shared, we've really been deploying normalized basis as we think about moving through an entire cycle. We engaged in a pretty robust study, kind of, second, third quarter of last year just because we knew that it was unusually attractive and good time in the market. So really started deploying significant scenarios at that point in time and stress testing. The process today and yesterday has been underwriting to truly what the current market is telling us with really some downside stress testing. So, and as we shared, you know, for deals offered, we've been working really hard to solve the math equation for what does, and renegotiating each of those and in some cases walking where we need to. Hopefully that helps answer the question, but we've been underwriting to slightly where we've been reporting, but also very sensitive to an evolving market.

The good news, Alan, is we have a solid position. Therefore, we don't feel pressured to close any deals that don't make sense. This is why I believe we should closely examine the projects that are in process and any new deals. It’s a good time to conserve our resources and wait for the right investment opportunities. So yes, we are going to remain very aggressive in our expectations at this moment.

Perfect. I appreciate the extra insight there. Thanks a lot.

Our next question comes from Mike Rehaut from JPMorgan. Please go ahead.

Hi, guys. Good morning. Doug Wardlaw on for Mike. I just wanted to know if you guys could get further insight into impairments. Is that something that you guys have been on, you know, extra alert for? And if so, do you have a ‘watch list’ of communities you feel are close to impairment? And what metrics are you guys looking at that would kind of indicate a potential impairment in common?

Sure. Good question. In Q3, we only had one project across the company that made it to our impairment list. We'd expect to see more of those in the future as there's always going to be outliers on both sides of the bell curve. However, based on our improved margins, we really don't today see any systematic impairments ahead at this time. As it relates to what gets on the watch list. Once the projects sees backlogs on a consistent level at 10% or below margins, we start to put it on the watch list. In terms of write downs, those would occur eventually if the book value exceeds the discount of cash flow, the fair value of the discounted cash flows. So we'll continue to monitor those quarter-over-quarter. But based on our margin profiles today, other than an outlier in that bell curve, we really don't see anything material ahead of us.

Got it. Thanks, very helpful. And then lastly, just on construction costs, I know you guys touched on it a little bit. But for Q4, where do you envision that? I know they've been going down a little bit throughout the past few quarters and moving into 2023. What are you guys anticipating for those costs?

Yes, we have seen continued pressure on costs. However, as we observe a moderation in starts across the industry, we believe that, based on incoming calls regarding initial cycle times, costs will decline over time. It's important to note that in Q4 and Q1, we will still experience the higher lumber costs that increased during the year. We expect significant reductions in our average lumber cost to begin in Q2, potentially down to around $17,000 in average lumber pack. Still, Q4 and Q1 will carry those elevated lumber costs. Overall, we have noticed a slowdown in costs and have managed to avoid most increases. Ideally, we hope to see reductions in the long run, but that has not happened yet, as most builders are focused on completing year-end closings.

And I expect only back in a normal environment, the bounties by the end of this quarter and some of those things that we've seen all year, but that we should move on from that as we move it to next year.

Great. Thank you, guys.

Thank you, Doug.

Our next question comes from Alex Rygiel from B. Riley. Please go ahead.

Thank you. Two kind of more general questions. How do you see the weakness in this cycle different from past cycles? And then in your opinion, sort of, one of the more important items that need to happen for demand to stabilize and therefore the macro homebuilding space to reach, sort of, a new normal at these higher interest rate levels?

Hi, Alex. That’s a great question. I would say this cycle doesn’t reflect previous cycles for various reasons, especially considering the aftermath of the pandemic. Before the pandemic, demand was strong, consistently improving quarter over quarter and year over year. However, the pandemic changed everything. Over the last 24 to 30 months, particularly in the last four to five months, we've seen unprecedented levels of price appreciation, which is a significant distinction. Additionally, interest rates have more than doubled in just a few months. Despite the decline in sales, demand has remained relatively resilient, though it has been inconsistent week to week, responding to the latest news, whether from the Fed, media, or local market discounts. Affordability is a genuine concern for many buyers, but confidence is equally important. For demand to stabilize, we need clarity on what the Fed will do moving forward. Housing is heavily impacted by their actions against inflation, and what that entails remains uncertain. There are differing opinions on whether the Fed will continue to act aggressively or begin to ease as early as next year. Projections for next year, such as those from NAHB, suggest rates could be around 5.5%, significantly lower than where we are now. Gaining consumer confidence will help, particularly among savvy move-up and active adult consumers. Previously, fear of missing out drove market behavior, but now there’s a fear of buying at the peak. Achieving stability and clarity on Fed actions will be crucial. Anything else, Erik?

Yes, I would echo a lot of that, Sheryl. I think the backdrop really is comparing to prior cycles, a little bit of a tenuous affordability condition that we had that we're all sensitive to. But I think, you know, when you think about the speculation that this has been really expensive. Well, that's the supply levels that were really relatively light, compared to the prior cycle. Those are kind of positive backdrops as we look at those comparisons. Then, yes, as we look at confidence going forward, we want to see how the supply levels kind of move through the system. Rates, we got to see some Fed stabilization and then just general confidence. The good news today is we do see elasticity in the market.

Yes, and not a buildup of finished inventory like we saw last time, right?

Very helpful. Thank you.

Thank you, Alex.

Our next question today comes from Truman Patterson from Wolfe Research. Please go ahead.

Thanks. It's actually Paul Przybylski. I appreciate the color on July, August, and September order trends. I was wondering if you might be able to add anything on how October is going so far?

You know, I'd say a continuation, Paul. Good morning, of Q3, you know, week-to-week is a little bit different, I think if we just continue to see sensitivity to local factors, mostly interest rates. I mean, when we look at what happened to the tenure last week, and rates approaching 8% that makes its way around. It still just some uncertainty in the marketplace. So they are comparing, consumers are comparing incentives and price adjustments across the market. But, you know, you have a good weekend. Generally, I see those as rates stabilize. When they shoot up, it absolutely impacts traffic.

Okay. Thank you. And then you mentioned you had $66,000 average deposit. How does that split? Do you have different deposit requirements between your build-to-order and spec sales? And then if you could remind me what is your mix of build-to-order versus spec?

For Q3, our mix of homes was 40% to-be-built and 60% spec, and we have started to gradually see an increase in the percentage of our to-be-built homes.

Yes. And I won’t say, I mean, correct me, Lou, if you feel different. I won’t say that we have a different protocol for our deposit strategy, Paul. I think we try to get 10%. In reality, I would tell you, if you're getting closer to a completed house, and the more affordable that you won't see that full 10%, so that could be anywhere between 5%, 7%, certainly waiting on that 10% is we do see higher deposits in our active adult business and we see a higher percentage of overall cash. But we don't, you know, the policy around across the country or the approach around the country for just for times like this, it's just good business, Paul, as you want to have those deposits on hand. I absolutely think it's played quite a factor in our 15% can rate for the quarter, compared to I think something much higher across the industry. We do see more of those cans coming across spec, so I do think there's that correlation to lower deposits.

I’d say our teams have done a great job using the deposit as part of the overall negotiations. So if we're giving some additional incentives, we've asked for more deposits, which I think is serving us well, as Sheryl said.

If I could ask one last question. Sheryl, in previous cycles, if pricing were to decrease by 10%, what would be the expected timing for cost savings from your trades? Do you typically recover half of that price reduction, or is it usually higher or lower? Is there a rule of thumb for this?

Yes. It's an interesting question. I don't know that I could quantify it specifically, there's just always this timing lapse, as you might imagine, Paul. I mean, right now, you've got this lumber overhang. So from a percentage standpoint, because we've never seen the run in lumber that we've seen this time, you're going to get a higher percentage just there. I mean, you have some still pretty strong tailwinds on the multifamily starts. So a lot of it's going to depend on how quick, what really happens to starts as we move into next year. As you can see, they haven't come through the numbers, I think that we may have imagined. But we already are seeing some impact at the front end of the schedule and are being very aggressive with our trades. I would tell you to date given total starts it hasn't yielded the numbers that I expect we’ll see as we move into next year. But I would expect that we should get a significant piece of what we've lost over the last two years back, but my guess is it never comes back out as quick as it goes in. That will take somewhere between 12 and 18 months before we really and that's assuming starts remain depressed.

I think you'd probably agree with, you know, costs have been much more stickier this go around as the labor availability is so much lower and the supply chain channels as we've seen. So it may take just a little longer than historic norms.

Yes, so I think the backlogs with our suppliers, manufacturers are still very strong through the first quarter of next year, and labor is still a challenge. So it'll be interesting to see which comes first. I think we'll start to see labor on the front end come back down a bit, then we'll see the cost of goods come down and then followed by labor if we really see continued depression and starts.

Appreciate it. Thank you very much.

Thank you.

Our next question comes from Mike Dahl from RBC Capital Markets. Please go ahead.

Hey, guys. This is Ryan Frank on for Mike. Thanks for taking my question. I just wanted to follow-up on that about the margins right there, given that lumber and trade are still going to be pretty high and you're starting to already decrease ASPs. I know you're not giving guidance, but can we get any sense for the magnitude of sequential margin declines maybe over the next quarter or two? Because it seems like the houses you're selling at right now are probably a few hundred basis points lower on margin, but those obviously won't flow through. So I just the cadence to kind of getting there over the next quarter or two?

Yes. As you know, we aren't providing guidance on margin, but I would frame it like this. Last quarter, we indicated margins would be between 25% and 26%. We still expect to be in that range, likely leaning towards the lower end depending on our market mix. The number of specifications we deliver in Q4 will influence our full-year margins slightly in either direction. However, as incentives rise over time, we will likely see our margins decrease, but we do have a solid backlog heading into Q4. That's why we feel confident about staying within that range for Q4. Over time, though, we anticipate that margin will begin to drop heading into next year.

Okay. So you're not expecting any sharp step declines maybe in the immediate future? It might be kind of a sequential decline, or I mean a gradual or, consistent decline, I should say?

I'd say consistent decline is reasonable. I think Sheryl mentioned earlier that we're seeing mid to high single-digit, you know, combined incentives and reductions so far in our orders.

Yes. You know, in a safe can is as good or better than a new deal? Because if you think about the numbers I shared where, you know, we're spending potentially, you know, 1.5% of ASP, 2% of loan amount to help some of our backlog, compared to what that would take for a new sale. You know, and you look at our backlog going into New Year, so it's going to take to lose point some time to bleed in, but the homes that are being sold today are certainly not at the margins that we've reported today.

Got it. Helpful. And then last one from me, just on the buyer qualification, so DCIs have cropped up to 39%, I think you said this quarter. I don’t know if that's an average or if that's at the end of the quarter. But what are you seeing in terms of outright rejections or even fallout out of backlog just due to an actual inability to qualify? Has those stepped up meaningfully yet?

Yes, you can see from our cancellation rate that it’s not as significant as one might expect. Even though those numbers have decreased this quarter, our average consumer still has a solid cushion regarding straightforward denials from our shoppers, which are very low, just a single-digit percentage. It's crucial to differentiate between qualification and the desire to buy. Even though our buyers can qualify at higher interest rates, when considering their financial cushion, the specific rates—whether around 400 or 450 basis points for conventional buyers or approximately 275 basis points for FHA buyers—indicate a tighter situation than in previous quarters. However, much of this is emotional. The average interest rate we are closing our customers at this quarter is 5.29%, with FHA buyers closing at 4.76%. Looking at our backlog, we’re in a strong position, with 86% of November locked and over half of December's backlog secured. Our conventional buyers are locked at 5.7%, and our FHA buyers are locked at 5.3%, which still shows a substantial difference from the market par rates, aiding in the affordability aspect you mentioned.

Thank you. That was very helpful. That's all for me.

Thank you.

Our next question comes from Alex Barron from Housing Research Center. Please go ahead.

Yes, thank you very much. I wanted to ask and I'm sorry if I missed some of these comments. I was trying the signals, but on build time, have you guys seen any improvements at all? And if not, are you guys doing anything as far as trying to improve the labor shortage situation? I don't know, by paying subs more than your competitors or something just to kind of attract people that come and work on the homes? And related to that, if what is your average build time? And are you seeing any cancellations because clients are saying, well, you know, I'm still in backlog for too long and maybe I should go buy a house from somebody who's got a quick move-in or that type of thing?

Good morning, Alex. Let me address that and may have some others chime in. As noted in the prepared remarks, our cycle times have slightly increased this quarter, roughly by about 10 days. To date, we have not observed any improvements on the back end and we anticipate that Q4 will be very challenging, especially as all the builders are trying to wrap up their years. On a positive note, we are experiencing increased trade availability on the front end, which should lead to some improvements in cycle times over time. However, as Sheryl mentioned earlier, this varies by market; we have seen strong multifamily activity, but those markets are experiencing more labor constraints. Nonetheless, with the decrease in builder starts over time, we should see some improvement as well. Overall, our cycle times this year have increased by about 1.9 months, and we are currently averaging 9.4 months. There is significant variability across the company, with a low of 6.5 months in Southern California and a high of nearly a year in places like Austin. In terms of addressing the labor market, I recognize this is a challenge across the industry, and the LBA is working to bring more trades into the homebuilding sector over time.

Talent foundation more specifically, right?

Right.

It's been sponsored by the LBA, yes.

But that's going to take some time, unfortunately. Unfortunately, yes, cycle times today until we really start to see the supply chain continue to normalize are going to be elevated. However, over time, we've averaged been able to turn our assets about two times a year. So obviously, we're not doing that today when that does come through the business over time, we'll start to see our ability to carry a lot less units and at any given point in time.

You mentioned that there are many options available to trades today, and it's important to treat them with respect. They need assurance that the job site will be ready upon arrival to avoid any idle time, and they must receive timely payments. These factors have always been significant, but they are crucial in the current climate. While we are certainly gaining our share, losing points, we feel optimistic about our various programs designed to support both our internal talent and help trades attract, onboard, and train new talent. This approach will continue to assist us throughout the entire cycle.

I think the question I didn't address is about potential cancellations related to the extended construction timelines. Overall, we aren't seeing a large number of cancellations, but there are certainly cases where people need to move into a home, and we've noticed some individuals canceling because of that.

And maybe lastly on the Build-to-Rent side, obviously seeing some pressure there, but we're really seeing the benefits of simplicity and cadence and kind of the efficiency of that model when you only have two or three floor plans, you just kind of create that kind of cadence.

Okay, that's very helpful. Can I ask another question? I'm not sure if you mentioned what your starts were for the quarter. Additionally, what are your thoughts on starting more spec homes? Some builders have indicated that customers prefer spec homes that can close within 30 to 90 days. At the same time, we know there are many homes currently under construction. What's your perspective on starting more spec homes versus focusing on the ones you already have this quarter?

Yes, Alex. That's a good question. Our starts for the quarter were 14,146, which is approximately 1.5 starts per outlet as we've worked to reduce our spec inventory levels slightly. Quarter-over-quarter, our spec units dropped 17%, moving from an average of 9.5% per outlet to 7.8%, which aligns better with our future goals. We're pleased, and more importantly, we're happy to have only half a spec per outlet as consumers have really absorbed those inventory units.

Complete it, right?

Yes, spec completed as our consumers have really absorbed that inventory as it approaches completion. So going forward, I'd say we'd expect that our starts will more closely match our sales pace as we've reached more of a desired spec inventory level.

And the only thing I'd add to that is, you know, as I said in my prepared remarks, 95% of our cans were on spec units. So we really do believe in this balanced model of allowing a consumer to pick a lot, pick a plan, have all the specifications in the house they want. We prefer not to write deals multiple times and keep a nice balance of specs and certainly at the more affordable levels is where you'll see the higher spec counts for us.

Thank you. There are no further questions at this time. I will now hand you back over to Sheryl Palmer for closing remarks.

Thank you for joining us today. We appreciate the opportunity to share our third quarter results with you. Wish you all a very good healthy holiday season and we'll look forward to talking to you in the New Year.

That concludes today's Taylor Morrison Home Corp earnings webcast and conference call. You may now disconnect your lines.