Good morning. And welcome to Taylor Morrison's First Quarter 2025 Earnings Conference Call. Currently, all participants are in listen-only mode. Later, we will conduct the question-and-answer session, and instructions will be given at the time. As a reminder, this call is being recorded. I'd now like to introduce Mackenzie Aron, Vice President of Investor Relations.

Thank you. And good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements. 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. To begin, I would like to recognize our team's exceptional performance during the first three months of the year. Among the highlights, we delivered 3,048 homes at an average price of $600,000, producing $1.8 billion in home closings revenue, up 12% year-over-year, with an adjusted home closings gross margin of 24.8%, up 80 basis points year-over-year. Combined with 70 basis points of SG&A leverage, our adjusted earnings per diluted share increased 25% while our book value per share grew 16% to approximately $58. Once again, each of our operational metrics met or exceeded our prior guidance. These strong top and bottom line results reflect the benefits of our diversified consumer and product strategy. Especially in volatile market environments, this diversification is a valuable differentiator that we believe contributes to volume and margin resiliency. From a sales perspective, the slow start in January gave way to stabilization in February and modest growth in March, following the downward pattern, albeit with slightly less velocity than we would have otherwise anticipated during the early spring selling season. In total, our monthly absorption rate increased to 3.3 per community from 2.6 in the fourth quarter but was down from the near record of 3.7 we achieved a year ago. As I noted on our last earnings call, we experienced exceptional sales trends in the first quarter of 2024, driven by a decline in interest rates that helped unleash the demand. Alternatively, this first quarter, interest rates moved higher alongside macroeconomic and political uncertainty related to tariffs and immigration. More recently, the significant volatility in the spot market and additional policy-related changes have impacted buyers' sense of urgency, causing some shoppers to move to the sidelines as we have seen before during periods of uncertainty. Despite these headwinds, it's worth highlighting that our first quarter's pace was still solidly ahead of our pre-COVID historic average of 2.6 from 2013 to 2019, reflecting our strategic shift into higher pacing larger communities that is helping support our long-term ROE target. It's also worth highlighting that our sales success was in part due to strong year-over-year improvement and the convergence of online home reservations, another driver of improved efficiency gains. Appreciating the macro backdrop, our first quarter performance highlights several key drivers of our success that I believe are unique to Taylor Morrison. First, even in the face of rising incentives across our industry, our diversified portfolio is relatively insulated to broader net pricing pressure due to the strength of our buyer appeal and the quality of our locations and desirable communities and product offerings. By consumer group, our first quarter orders consisted of 32% entry level, 47% move up, and 21% resort lifestyle. On a year-over-year basis, our resort lifestyle segment was the only one to post growth, with a 3% increase in net orders aided by strength in Florida, while our move-up sales were down just 2% and entry-level sales declined steeply, down 21%. Secondly, our emphasis on personalized finance incentives, including proprietary forward commitment structures, allows us to be tactical in our use of such tools to help our consumers with their home purchase. 42% of our first quarter closings used a forward commitment, just over half of which were first-time homebuyers. By using these and other incentive programs effectively, incentives on new orders increased only 20 basis points sequentially during the quarter. As we have discussed in detail, we believe our diverse consumer segmentation is critically important given varying demand sensitivity and financial profiles among different buyer groups that contribute to healthier, more resilient growth opportunities and pricing over time. To that point, we have been closely monitoring our proprietary shopper survey data for any insights into the consumer mindset of late. This information is always an important input into our marketing and incentive offers as we look to best address consumer needs. Unsurprisingly, home prices and interest rates have been the most common theme cited by shoppers in their home buying decision. However, parsing the data by generations reveals important differences. These responses are more common for Gen Z and millennial consumers than for Gen X and boomers, who are instead more focused on finding their next home, floor plan, and community location, as well as selling their existing home. Interestingly, across all age groups, uncertainty around tariffs was cited equally but not as a significant factor. This data gives us confidence that demand, particularly in our second move-up and resort lifestyle markets, will likely recover quickly as consumers regain greater clarity on the macro outlook. Lastly, because of the expertise of our local teams, we are nimble in balancing pace and price at the community level as we make daily operating decisions designed to reach our targeted returns. Given our diversification and emphasis on core locations, there is not a singular approach to our pace versus price strategy but rather an ongoing community-specific process that considers each asset's unique competitive dynamics, sales momentum, and other market influences. We believe that this community-by-community approach is even more critical in the current environment because we are seeing significant emergence in the performance of core versus non-core locations. As Erik will elaborate, total inventory of both existing and new homes has risen sharply across the country, with the vast majority of this pie located in non-core submarkets. In these markets, which primarily serve entry-level consumers with spec offerings, discounting and incentives are the greatest. Alternatively, prime core communities, particularly with to-be-built products, are generally faring better with manageable incentives and solid pricing. With this in mind, it's worth highlighting that 58% of our first quarter closings were spec homes, including a record 27% that were sold and closed intra-quarter, well ahead of the 21% to 24% share in the prior two first quarters. While our teams have been effective in selling and closing spec homes, finished inventory at quarter end was elevated compared to our targeted levels at 2.4 homes per community, following the slower start to the spring. In response, we moderated our first quarter starts pace by 6% year-over-year and will remain highly selective in new starts moving forward. Additionally, we will look to move through finished specs for the remainder of the selling season to return to more normalized inventory levels, resulting in a higher anticipated spend penetration in the second quarter. As a result, we expect incentives to rise more meaningfully in the second quarter. Given the lower margin and price associated with specs compared to to-be-built homes, we expect moderation in our home closings gross margin to around 23% and in our average closing price to around $585,000 in the second quarter with approximately 3,200 deliveries. For the remainder of the year, we are assuming incentives remain at current elevated levels, although market conditions are highly fluid and dependent on mortgage rates and consumer confidence. As a result, we now expect to deliver between 13,000 to 13,500 homes this year at a home closing gross margin around 23%. Alongside this revised volume forecast, we have reduced our expected land investment this year to approximately $2.4 billion from $2.6 billion previously and are ensuring that new land underwriting decisions are sensitized to a wide range of pricing and case scenarios. At the same time, we now expect to repurchase approximately $350 million of our shares outstanding this year, the high end of our prior target. While the current environment has made it challenging to provide near-term guidance with strong conviction, we remain confident in our long-term trajectory on our path to 20,000 closings by 2028. The path will not be a straight line as we navigate the market, with 2025 now expected to represent the season on our path forward. However, we believe our disciplined underwriting and attractive product position is strongly supported by a business capable of generating low to mid-20% gross margins from closings and high teens returns on equity over time. Looking further out, we continue to believe the market overall remains under supply and demographics support us of the strong need for new construction. As you heard at our Investor Day in March, we have transformed and solidified Taylor Morrison's operational capabilities through strategic rationalization and optimization of our product, community footprint, and customer segmentation. By leveraging digital sales tools and personalized finance incentives, we are driving efficiencies throughout our business from lead generation, sales conversion, and revenue opportunities. Backed by our industry-leading innovation and customer experience, we are confident that we are well positioned for outsized growth in the years ahead. In aspiring to reach 20,000 closings, we will prioritize bottom line earnings and returns for our shareholders while always maintaining the health of our balance sheet. We are not interested in growth for growth's sake. As our strategy has proven over the last decade-plus, we seek to maximize long-term return potential by thoughtfully balancing both base and price through a uniquely diversified portfolio that is well positioned to withstand housing cyclicality. With that, let me now turn the call to Erik.

Thanks, Sheryl, and good morning. Beginning with our land portfolio, our owned and controlled lot inventory was 86,266 homebuilding lots at quarter end. Based on trailing 12-month closings, this represented 6.5 years of supply, of which only 2.7 years was owned. Of these total lots, 59% were controlled via options and off-balance sheet structures, up from 53% a year ago to a new company high as we continue making progress toward our goal of controlling at least 65% of lots. The importance of being able to self-develop our communities in capital-efficient ways cannot be understated, and our recent survey has suggested that over 80% of our shoppers value the community and amenity offerings at least as much as the actual home, reinforcing our strength as a community developer. As Sheryl noted, we now expect our homebuilding land investment this year to be around $2.4 billion, down from our prior expectation of approximately $2.6 billion, driven by prudence along with the reduction in the anticipated full year closings. Of course, our ultimate cash investment will be dependent on market opportunities as we maintain our disciplined underwriting guardrail. As a reminder, all previously approved transactions as well as future phases of development are re-reviewed by our investment committee for final alignment or any necessary adjustments before closing. From a community count perspective, we forecast an ending outlet count of around 345 in the second quarter and at least 355 by the end of the year. As we have discussed previously, our average underwritten outlet size and sales pace expectation have evolved over time. In recent years, both metrics have increased, allowing us to efficiently expand our business on a smaller community count, all else being equal. As I have shared in recent quarters, we are carefully tracking the rising inventory of both resale and new home supply, which has been more pronounced in Florida and Texas. We continue to find that the majority of the supply would not be considered directly competitive to our new home communities. For example, specific to new home inventory in Texas, we have found that the sub-markets in which we operate have an average month of supply that is 19% below that of our other sub-markets within the respective MSA, again highlighting the benefits of our forward focus. To reinforce that our emphasis on quality locations resonates with our consumers, we recently surveyed our shoppers whether they consider their Taylor Morrison community of interest forward, which the overwhelming majority of respondents affirmed. Somewhat related, over half of the shoppers also confirmed that they were aware of the home insurance benefits associated with new construction, including superior availability and cost implications. Taken together, both of these factors helped partially insulate us from some of the headwinds currently facing our industry. We will continue to leverage our internal muscle of being able to decipher market data and to deeply engage with our shoppers and buyers in understanding their concerns, needs, and wants as the cycle evolves. With that, I will turn the call to Curt.

Thanks, Erik. And good morning, everyone. For the first quarter, reported net income was $213 million or $2.07 per diluted share. After excluding an impairment charge, our adjusted net income was $225 million or $2.18 per diluted share. This was up 25% from adjusted earnings per share of $1.75 in the first quarter of 2024, driven by higher revenue due to increased closing volume, a higher adjusted home closings gross margin, healthy SG&A leverage, and a lower diluted share count. Our closings volume increased 12% year-over-year to 3,048 homes. The average closing price of these deliveries was roughly flat from a year ago at $600,000. This produced home closings revenue of $1.8 billion, up 12%. From a production standpoint, we reduced our starts pace by 6% to 3.3 per community from 3.5 a year ago, equating to total starts of 3,382 in the first quarter. This moderation is consistent with our strategy of aligning new starts with sales and carefully managing our inventory to achieve targeted levels. At quarter end, we had 8,032 homes under production, of which 3,482 were specs, including 840 finished homes or 2.4 per community. During the quarter, our cycle times continued to improve and were down approximately 25 days from the first quarter of 2024 and more than 120 days since the peak we experienced in the first quarter of 2023. The ongoing improvement in cycle times allows us to start and close a higher number of homes during the year, improving our ability to flex our growth potential as market conditions evolve. As Sheryl noted, we now expect to deliver between 13,000 to 13,500 homes this year, down from our prior guidance of 13,500 to 14,000 homes. This includes approximately 3,200 homes in the second quarter. Given the higher anticipated spec penetration in the coming months as we sell through finished inventory, we expect the average closing price to moderate sequentially to approximately $585,000 in the second quarter. However, for the full year, we continue to anticipate the average closing price to be in the range of $590,000 to $600,000. Our home closing gross margin was 24% on a reported basis and 24.8% adjusted for a $15 million impairment charge. This compared to an adjusted home closings gross margin of 24.9% in the prior quarter and 24% a year ago. As we look into the second quarter, we anticipate our home closings gross margin to moderate to approximately 23%. This is reflective of a higher mix of spec homes, which generate lower margins than to-be-built homes in part due to higher competitive pressures. We're also expecting incentives to trend higher as they did throughout the first quarter as market dynamics evolve. Recognizing there are more uncertainties than is typical as we look out to the remainder of the year, we currently expect our home closings gross margin to be around 23% this year, the low end of our prior guidance range. This assumes land cost inflation of approximately 7%, low single-digit stick and brick cost inflation, and a continuation of challenged market conditions. Taking a step back, we are pleased that this year's home closings gross margin outlook remains within our long-term target of the low to mid-20% range despite the significant macro headwinds and competitive pressures at play. We continue to believe that our diversified consumer segmentation and mix of spec and to-be-built homes enhances our long-term margin resiliency. Now to sales. We generated 3,374 net orders, which was down 8% from last year's exceptionally strong first quarter. Our monthly absorption pace was 3.3 per community, down from 3.7 a year ago while our ending outlet count was up 4% to 344 communities. Cancellations equaled 11% of gross orders. This was consistent with long-term norms as we continue to benefit from our diligent prequalification requirements and average backlog customer deposits of approximately $48,000 per home. SG&A as a percentage of home closings revenue was 9.7%, down 70 basis points from a year ago. For the year, we continue to expect our SG&A ratio to improve to the mid-9% range from 9.9% in 2024. Financial services revenue was $51 million with a gross margin of 44.7% as compared to $47 million and 46.5% in the first quarter of 2024. Our financial services team maintained a strong capture rate of 89%, up from 87% a year ago. During the quarter, buyers financed by Taylor Morrison Home Funding had an average credit score of 751, down payment of 22%, and household income of $187,000. Turning now to our balance sheet. We ended the quarter with liquidity of approximately $1.3 billion. This included $378 million of unrestricted cash and $934 million of available capacity on our revolving credit facility, which was undrawn outside normal course letters of credit. Our net homebuilding debt to capitalization ratio was within targeted ranges at 20.5% at quarter end and our next senior note maturity is not until 2027. During the quarter, we repurchased 2.2 million shares of our common stock outstanding for $135 million. At quarter end, our remaining repurchase authorization was $775 million. Having repurchased a total of approximately $1.9 billion of our shares outstanding since 2015, we expect to continue utilizing our healthy cash generation to repurchase our shares with programmatic and opportunistic strategies. For 2025, we are now targeting total share repurchases to be around the high end of our prior guide range at approximately $350 million. Inclusive of this target, we now expect our diluted shares outstanding to average approximately $101 million for the full year, including $102 million in the second quarter. Now I will turn the call back over to Sheryl.

Thank you, Curt. As we look ahead, there are more macro-related uncertainties facing the business than I can recall at almost any point in my career outside of the early days of the COVID pandemic. Consumer confidence is the most critical factor in the long term, as it will be key in determining our sales and pricing holds up for the remainder of the spring selling season. I expect we will continue to see many home shoppers taking a wait-and-see approach to their purchasing decisions until there is greater clarity on the economic outlook. Thankfully, I also believe with confidence that Taylor Morrison has never been in a stronger place organizationally and financially to weather any potential market volatility. We have a strong balance sheet with well over $1 billion in liquidity, a flexible operating model that is able to quickly flex and pivot given our expertise in both specs and to-be-built production, and a stronger than average customer base that is well positioned to move forward with their homebuying plans as they regain confidence. And as always, I want to end by thanking our team members across the country, especially in this unique market environment. You distinguish yourselves with your tenacity, dedication, and service to our home buyers. Thank you for all you do. Now let's open the call to your questions. Operator, please provide our participants with instructions.

Our first question comes from Paul Przybylski from Wolfe Research.

I guess to start off, Sheryl, can you walk us across the various Texas and Florida markets and provide any color on any positive or negative demand changes you've seen over the past three to four months?

When I think about Florida, we've noticed significant year-over-year sales growth, making it one of our strongest markets. Orlando remains robust for first-time buyers, showing good growth despite challenges in the market. It's one of our lowest average selling prices, and we opened several new communities there. While sales and community counts increased, closings were stable, possibly affecting margins due to the focus on first-time buyers. In Naples, community growth and sales were also strong, and the Sarasota market continues to excel. Our Esplanade brand is launching new amenities that have attracted good traffic, though not at our usual high levels. Moving to Texas, Austin has faced market turbulence for nearly two years, but our team is gaining traction. Our PAM rate has decreased year-over-year, indicating a positive market response. We closed some competitive communities at year-end with flat discounts. There's a strong market vibe in Austin, and I believe it's rebounding. In Dallas, we're seeing significant growth, and the market has nearly doubled in size, highlighting our successful presence. Lastly, Houston is doing well; we've repositioned the market to lower average selling prices, attracting a new consumer group. Overall, while pace is increasing, discounts are decreasing, which is a positive trend. Erik, would you be able to provide some insights on the resale market?

To conclude a few thoughts, we've conducted a study to assess our positioning in the resale market, particularly in Florida and Texas. We've found that around 17% to 20% of homes are competitively positioned, which we view positively. In Texas, our portfolio's core locations are beneficial as they reduce our exposure to new home inventory levels. Regarding Florida, recent updates indicate that the monthly resale inventory has decreased from January to March, which is a positive sign. Although the average months of supply in our Florida markets is still somewhat elevated, it remains manageable, and we will continue to monitor the situation.

And next question, any thoughts on M&A in the current environment, what are you seeing with regard to deal flow? And we've all seen what's happened to the public builder valuations. Or are you seeing the private builders and what they're asking becoming more rational? And as a follow-on, just how is the Indianapolis integration come on?

On the M&A front, interestingly enough, I would say the amount of packages has probably picked up. And it makes sense, if you think about just some of the market challenges, I think you're seeing some smaller private, and I think it's about time. Are we seeing some rational differences between the bid and ask? I think getting better, probably not exactly where it needs to be. So we'll continue to look at packages. And as we've always said, we have a very high bar on expectations. But yes, I think it's been interesting to see some of the package activity pick up.

I think valuation-wise maybe expectations calibrated to kind of the fourth quarter of last year, but maybe not necessarily completely recalibrated.

Not quite there yet. I think those are going to be the deal kind of negotiations to see if any of those start to make sense, but we'll see. As far as Indy, integration is done for the most part, I think we're still, from a system standpoint, there are probably just some of the last plans that are making their way to the system. Honestly, really excited about what we're seeing there. I think I know that we had our best sales quarter in the first quarter. I'd say that was well in line with our expectations. And as we've talked about before, Paul, we're really looking forward to growing that business in more core market, ASPs under $400,000 this year. It's just a really important new position for the company.

Our next question comes from Michael Rehaut of JPMorgan.

First, I'd love to get, if possible, a little bit of better sense of cadence of order trends through the first quarter and April, specifically in terms of sales pace. And also to the extent that there has been some volatility obviously in the marketplace, what your approach has been to incentives and discounts and perhaps how those have trended as well throughout the first four months of the year.

As far as sales cadence, I'll be honest, I was a little surprised how consistent the first quarter was. We saw a 10% increase in February over January. We saw in March another 13% over February. I think in the last call, we articulated that we came out the gate in January a little slower. When I look at that compared to last year, which was a stellar first quarter for us, last year, February was down and March was flat. So all in all, very, very pleased with the first quarter sales results. As far as what we look like in April, we expected April to probably be the sales peak month of the year. Obviously, we're not done yet. I'm not sure that will be the case. It's actually day by day, week by week. I look at the April results again. We definitely saw the impact of the Liberation Day announcement in the first week, that's what I think they have put some folks on the sidelines. We've seen a pick up each week since then. Too early to say how we'll finish the month. I think it's probably closer to first quarter averages. But right now, like you said, we're looking at sales, we're looking at incentives. We're looking at our offering not on a weekly or monthly but probably on a daily basis because the consumers are responding to daily news with everything that's going on in the macro marketplace.

The second question focuses on the latter half of the year. The guidance suggests a gross margin of approximately 22.5%. Previously, you mentioned several factors contributing to this, including land inflation, some construction cost inflation, and potentially higher incentives. If I understood correctly, this comes after a 2Q gross margin guidance of 23%. I assume each factor plays a role. I'm curious if there is any estimated impact from tariffs that you can assess so far. Additionally, if you had to rank the key drivers of the guidance for the second half compared to 2Q, what would they be?

There's a lot there. So let me just kind of start. I think, yes, from a margin guide for the rest of the year, in our prepared comments, we talked a lot about higher spec penetration to a certain extent in some of the quarters, especially as we're looking at Q2. We also have, as we've stated, even back in the prior call from Q1 that we've got lot cost inflation over the course of the year that we're dealing with as well. So when we look at kind of the rest of the year, I think a lot of our quarters are going to be hovering around that 23% level given the course based on the fact of how many to-be-built we can still sell and close for the year whether it's late Q3 or even throughout Q4 and then the mix of specs as it balances against that. So again, we're going to hover around that 23% probably for the rest of the year. As for tariffs, lots of discussion, a lot of noise in the media relative to it. And as we're kind of looking at that and its impact on the year, we've kind of again guided to some low single-digit house cost inflation for the year. And so we're starting to see some increases mainly from kind of the metals and aluminum tariff and the 10% kind of blanket tariff. But for the most part, it's all impacting today kind of the metal side or the aluminum side, which is HVAC, which is fireplace boxes, post-tension cables, so along the lines of a lot of the metals that are in our products. So we are seeing that. But again, that will come through until Q4 because their recent kind of increases that will be going into some of our upcoming starts.

And well covered in our guide…

We're also, again, the guide that we have out there from a low single digits perspective. The lumber kind of tariff noise, that's on pause. If that comes to fruition, we see that mainly as a 2026 kind of event for us as we kind of look beyond.

We mentioned the tariffs as well, right, Curt? We're not ready to discuss the potential impact for 2026 yet. The good news for 2025, as Curt noted, is that it appears to be relatively modest. Until we have a clearer picture of how negotiations in various parts of the world progress, it feels a bit premature to make any predictions. Hopefully, we can revisit this topic next quarter. Additionally, regarding Curt's comments on margins, it's worth mentioning that interest rates are crucial for our incentive costs. There's a direct link between rising interest rates and our expenses related to these commitments. If rates stabilize, we might see some reductions, which would directly affect the expenses tied to our forward commitments when rates decline.

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

First question on the pricing environment. I understand your guidance assumes an increase in incentives to manage some of that speculative inventory. I'm interested to know if you believe the elasticity is still as high today as it was a year or two ago. Are the additional incentives still effective in encouraging buyers to make a decision, or are there circumstances where adjusting the base price might be necessary to close the deal?

That's an interesting question, Alan. It's somewhat challenging to provide a broad answer. As we prepare for this call and our cash calls, we've been discussing this with our sales teams, and there are indications of varying beliefs in different communities regarding how long consumers intend to hold their mortgages or their focus on pricing. We have effective tools in our arsenal and understand how financing incentives can affect monthly mortgage payments. We generally prioritize these incentives. Our TMHF team excels at tailoring solutions to meet individual customer needs. Adjusting prices would be our last resort. In some areas, we've noticed consumers are becoming more selective about what's important to them, with mortgage incentives being the primary focus. Price elasticity varies significantly by customer, especially among our move-up and active adult segments, as Erik highlighted earlier. The significance of community and home sites also plays a key role, with some areas even experiencing slight bidding activity on home sites this quarter. Therefore, making sweeping statements across our entire portfolio would be risky given the diversity of our customers.

Second question, on the land spend guidance reduction and just kind of thinking through the 20,000 closings target by '28. How should we think about the multiyear impact of spending less on land this year? Does that kind of push the envelope on '26 land spend in order to achieve that? Are you assuming maybe some loosening in the land market, either in terms of pricing or just kind of more ability to auction or bank land at better terms that will get you to the 20,000? Because I imagine it's not a zero-sum game if you're spending less on land or tying up less land that probably does have some type of impact on the multiyear growth trajectory.

We are currently well subscribed. Looking towards 2026, we have less than a 2% gap in our business plan regarding land needs, and for 2027, that gap increases to over 12%. These figures are quite typical. If we were to face significant slowdowns by this time next year, it would be a relevant discussion. However, at this moment, with 6.5 years of supply and ways to increase our control percentage, I have no concerns. We have access to financing tools and are balancing patience with opportunism. This year, 66% of lots approved by our investment committee utilized take down routing structures, while 27% were finished, which is unusual for us. In previous years, take down percentages were around 25%, and finished lots were closer to 15%. We are not finding truly distressed deals, but there are opportunities to negotiate beneficial arrangements as we move forward. So we are maintaining that balance between patience and opportunism.

Our next question comes from Matthew Bouley of Barclays.

You have Elizabeth Langan on for Matt today. I wanted to continue the conversation about land. Could you share your insights on what you are currently observing in the market regarding the deals you are considering? Are you noticing any changes in what developers are offering due to the uncertainty, or is everything remaining relatively stable?

I would suggest what we've seen to date is the opportunity to negotiate terms, more favorable terms that really allow us all to kind of look at what's transacting today in the market and what we project over the coming months. And so like I said, not an extreme level of distress but a little bit lower demand or froth in the market, which is just enabling the ability to negotiate terms and make sure that we're insulating ourselves against anything that we don't foresee in the coming months. So really terms would be the short term answer.

And then touching on gross margins, I know that you kind of mentioned that you're expecting to kind of sit around 23% to the second half. Would you mind talking a little bit about what you're expecting from your spec to to-be-built mix? Are you kind of expecting the spec to kind of peak a little bit more in 2Q and then taper off, or any color you can offer on that would be helpful?

I think we have said that in Q1, our spec closings were roughly 58%. And I think we also alluded to that our spec penetration would be higher in Q2 as well. So we're seeing just with our spec inventory that we have available and some of the pressures from a competitive perspective out there the need to lean in a little bit on some of the specs that we have out there. And so the penetration for Q2 will continue to be probably in the upper 50s, kind of 60% kind of range as we sit here today.

Our next question comes from Mike Dahl of RBC.

First question, I want to follow up on the gross margin cadence because the step down from the strong performance in 1Q to 2Q in particular is pretty meaningful. So this is a follow-up to a prior question, but just trying to pin down a little bit more on what the magnitude of the increase in incentives is that you've already seen over the course of the last couple of months versus in that 2Q and beyond guide. How much is anticipatory in terms of what you haven't yet seen but expect to have to do to close those homes?

The margin in Q2 is decreasing compared to previous periods primarily due to the increased presence of our inventory. Based on current market conditions, we have had to rely more on incentives to facilitate home transactions. While we haven't specified an exact discount, for Q2 the assumption is that there is a higher ratio of additional spec homes, along with some townhome communities experiencing reduced margins. Additionally, we did see some early completions of homes expected to close in Q2 that actually closed in Q1, contributing to our first-quarter performance. From the perspective of sales in Q1, we sold a larger percentage of higher-margin spec units than initially projected, which sets the stage for what we anticipate in Q2.

And then the second question, Sheryl, maybe just also following up on your April comments, and I want to make sure that we're clear. It sounded like your comments on April, not sure if it will be better than March and previously assumed it would be peak. But then you said something about maybe it's close to the averages for 1Q. Maybe just a little more clarification. Should we think about April as then being literally just if you sold a little over 3,000 homes in 1Q, April is lining up something around 1,000? And then seasonally, I think you'd normally still come down off that. So just how you're thinking about the seasonality dynamic?

We'll see how the month wraps up, Mike. You're correct in your assessment. I've mentioned that the volatility from the start of the month, coupled with some fluctuations in interest rates, has led to a mixed performance. It's been a turbulent month, which is undeniable. Our Division President from Atlanta, who is with us today, just reported their best week of the year, indicating a fair amount of variability across the business. I can say that we had a consistent upward trend throughout the quarter, week by week and month by month; however, April has been more unsettled, which isn’t surprising given recent news. As time goes on and we move past significant macro events, we might see improvements. Following last night, there may be a stabilizing effect on the market, and I hope we finish strong. However, until the month concludes, I'm uncertain about the final outcome. If I had to guess, I would predict it will be close to the average for Q1.

Our next question comes from Carl Reichardt of BTIG.

Sheryl, you mentioned that you haven't encountered an environment like this in your career, which is quite interesting. I wanted to better understand what you are observing regarding the lack of urgency and buyers stepping back. Do you think this is more connected to concerns about job security rather than income, with consumers being more focused on costs, living expenses, or is it more about investments and saving for the future? If you had to identify the primary concerns of those who have lost their sense of urgency, what would you highlight?

I agree with your observations. It's interesting because I felt encouraged during my meetings with the teams last week while reviewing our pre-call discussions. There’s positive feedback regarding traffic, indicating that people are still interested in home ownership. However, the situation varies across different demographics. For first-time buyers, the primary concern revolves around affordability; they view home buying as another expense in their budget. Living costs have increased across the board. As we move up the ladder to more experienced buyers, we're encountering individuals who are more sophisticated but are also influenced by various concerns, such as inflation and the potential for recession, along with questions about wage trends. They’re trying to gauge how these factors affect them personally. Fortunately, with our diverse range of products and communities, I believe once they find the right house and lot, they will proceed as Erik mentioned. I'm optimistic that once they gain some stability, we’ll see a significant increase in activity because there’s still considerable interest out there. However, it's currently taking longer for them to finalize their decisions. I would include all of your categories in this analysis.

And then you talked a bit before about Florida and Texas. I wanted to ask about the West where the orders were down, I think, 25%. I know stores were down 10. I know the comp was tough. I'm assuming there's more concentration of the entry level product in the West. But can you talk a little bit about why those trends were softer than the other two markets? Again, I'm assuming mix is part of it but maybe just give us some detail there.

I think, first of all, the year-over-year compares in the West are really, really tough. We had some really strong months last year. If I look at Phoenix, Q1, except for Q1 last year, was actually the best quarter but slightly down year-over-year with a nice margin beat. So I think they did a really nice job of kind of managing the pace or price discussion. As we move to California, generally inventory has not been as large a concern but we have seen some inventory build-up, and I think you just have a buyer there that's wanting to negotiate. Sales were still up year-over-year, some of that was community count growth. Sac, and that would be more of the Bay. Sac, I would tell you, sales were slightly down, modest discounts, modest margin was up year-over-year. But the overall market in South was off depending on the month, somewhere between 10% and 15%. I think some of that was just those federal layoffs kind of looming overhead. Southern California, minimal resale competition. Traffic, not bad. But we have seen aggressive new home incentives in the market. Some hesitation, Carl, there with the cultural buyer. But then I look at Orange County still very, very strong. If I were to round out kind of our markets, just to be thorough, I would say Denver was a little bit more impacted by inventory. And I would put Denver and probably Portland as our two most rate-sensitive markets. You can almost see it to the day. Having said that, I was really encouraged by the recent traction. In Denver, outlets or upsells were significant and we have good margins. Vegas, very steady. Excited about the Esplanade community coming to the marketplace that will happen later this year. Discounts were flat. Very different business for us. ASP profile, very, very good compared to what we were doing last year. So the mix of communities is good. But if I look at Las Vegas today, I think in this environment, it's tougher to get them financed. We talked a little bit about Indy, and I'd round it up with the Southeast. Charlotte always has strong community count growth, sales and closings up low PAM rates, discounts flat to slightly up. Charlotte enjoys one of our division's highest margins across the business, evolving land strategy, and Atlanta, we have really repositioned that business with strong community count growth and unit growth. So I expect that one to be one of our more consistent markets as I look at each quarter across the year. So hopefully, that helps.

Our next question comes from Jay McCanless from Wedbush.

Just one question for me. Sheryl, thank you for the color around sales pace thus far in April, but could you talk about cancellations? I know cancellations for 1Q were up a little versus last year, but be interested to see how they've trended so far in April.

It's difficult to provide precise details, and here's why. I would say that around Liberation Day, with everything going on, we did notice a slight increase in PAM, which tends to happen at the start of a new quarter. So I don't want to overstate this slight increase. I believe it will stabilize, as it typically does throughout the rest of the quarter. However, if I were to share the current absolute numbers, they are looking positive.

Our next question comes from Buck Horne from Raymond James.

Quick one for me. Have you guys seen any immigration enforcement actions recently that have either affected your communities directly or indirectly?

Yes, but not directly in our communities, Buck. The first one we heard about was in Alabama, and the second one was in Atlanta. I think there was a morning where several communities were impacted, but none of them were ours. So far, I can't comment on what the future holds, but today, Taylor Morrison hasn't been affected in any of our communities.

And also just thinking through the next couple of weeks ahead, student loan debt collections are poised to resume here in May. And it kind of coincides with your push to clear out some of your finished specs, which I presume may be more entry level weighted. How are you thinking through potential pressures on entry level consumers, or have you thought about the student loan issue, potentially how that affects your incentive levels to clear out those finished specs?

We're always tracking it. Obviously, this isn't the first time we've seen this noise in the system. We've never really had issues with student loan debt on any of our customers. Obviously, when we look at our first-time buyers, they're just in a little bit different place than I would say through, for the most part, a true entry level when I look at the room that they have. But you might recall that over the years, we've talked a fair amount about the room that our customers have between what they’ve qualified for and what they’ve done, what their rate is versus what they could qualify for. We have, over the years, seen a little bit of compression, obviously, as rates have moved past with our customers. But when I look across both our conventional, we're still over 400 basis points of room for our conventional buyers and just under 200 basis points of room with our FHA buyers. So that's a little tighter. So it would be naive to say that some of them might not recognize impact. But I would tell you, to date, we've really not seen it, and I still think that the consumers are kind of not stretching ourselves to the max. And so that's why we're still seeing some room even with the FHA buyer.

To throw back to our surveys, when we ask people if you're hesitating why might you be hesitating? And back to one of your first questions in terms of non-permanent residents, only 1% of our shoppers said that that's something to contemplate, so not jumping off the page. I didn't see anybody say student debt specifically with concern or hesitation. And what else is fascinating is that in March, when you look at consumer confidence, Gen Z is where it's up.

Which is so interesting more than any other group, right? Yes.

Our next question comes from Ken Zener of Seaport Research Partners.

Could you share your thoughts on what the year-end production and community counts might look like? I see that it's slightly down at the moment as you're working through some specifications. I'm curious about your outlook on the year-end units in production.

As we sit here today, we're at 8,032 units. And with the continued cycle time kind of focus of our teams and clearing out some of our anticipated specs over the course of the year, we would expect that number to probably moderate down a little bit further. I don't really have an exact number, per se, for you. But I would say it's going to continue to moderate down further based on the cycle time reductions and our focus on making sure our balance sheet is in the right position relative to speculative inventory.

I’m trying to understand your decisions regarding orders in light of Sheryl's comments about the uncertainty and high volatility, which align with the stock situation. How do you plan to measure your starts against your orders as you're reducing speculative units? Typically, you link starts to orders in the second quarter, but it seems like there are a few different factors at play. Are you considering tying your starts to orders moving forward?

Normally, what we kind of articulate pretty much every quarter is that we're going to align starts to our sales pace. Now we may lean in at certain times of the year relative to when we expect those deliveries to come off, so to speak, i.e., like in the spring selling season time period. But we will carefully kind of manage starts relative to what we're seeing in terms of sales velocity.

Our next question comes from Alex Barron of Housing Research Center.

My first question is around the topic of price cuts, just your general philosophy. Is it more in response to what other builders do, is it more in terms of finished specs that maybe haven't sold for so many days, is it mainly on specs and not on build-to-order? Like what is your general approach to price cuts?

It's difficult to overlook the current market conditions. However, as we discussed, we will continue to focus on our mortgage incentives, which include forward commitments for completed inventory and our proprietary program for homes that are still under construction and may not be ready for several months. We'll prioritize this approach. I believe one of our competitive advantages is our ability to tailor our services to meet each customer's unique needs. When prices are reduced, it inevitably affects our backlog, and we seek ways to provide equity to homeowners rather than taking it away. We've previously mentioned that we would never consider lowering prices on our to-be-built homes, as that’s typically where we see our highest margins and strengths. There is a range of performance among our spec homes, which is often influenced by what we observe in competing properties. The more peripheral the marketplace, the greater the competitive pressure and the incentives we may need to offer.

And then on a brighter note, I really like the Esplanade and what you guys are doing and what you explained to us in the Investor Day. So can you talk about how many communities are currently open and what the outlook is for that over the next 12 months, let's say, and versus a year ago, just to kind of see the growth pattern there?

As we discussed at the Investor Day, we anticipate that by 2028, our actual closings will nearly double. This projection is based on market penetration, which will influence the overall business dynamics. Specifically, we expect the active adult sector to see a significant increase in volume. Additionally, our portfolio includes several new communities that are being launched this year, along with various new amenities currently under construction. We share your enthusiasm, Alex, as this is an essential component of our business strategy, and you can expect to see Esplanade expand across the country.

In order of magnitude, what we shared is I believe up 35 or so, outlets open and about 80 some plus in the pipeline that are incubating. So that's the order of magnitude that Sheryl's referencing.

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

Well, thank you all for joining us on our Q1 call. We will look very forward to speaking to you at the end of the second quarter. Take care.

This concludes today's call. We'd like to thank everyone for joining. You may now disconnect your lines.