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

Thank you, and good morning, everyone. We appreciate you joining us today. Before we begin, let me remind you that this call, including the question-and-answer session, will include forward-looking statements. These statements are subject to the safe harbor statement for forward-looking information that you can review in our earnings release on the Investor Relations portion of our website at taylormorrison.com. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. These risks and uncertainties include, but are not limited to, those factors identified in the release and in our filings with the SEC, and we do not undertake any obligation to update our forward-looking statements. In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in the release. Now I will turn the call over to our Chairman and Chief Executive Officer, Sheryl Palmer.

Thank you, Mackenzie, and good morning, everyone. Joining me is Curt VanHyfte, our Chief Financial Officer; and Erik Heuser, our Chief Corporate Operations Officer. I am pleased to share our second quarter results, which met or exceeded our guidance on substantially all key metrics despite the unique environment. We delivered 3,340 homes at an average price of $589,000. This produced $2 billion of home closings revenue with an adjusted home closings gross margin of 23% and 90 basis points of SG&A expense leverage. Our performance reflects our diversified product portfolio that serves a broad and well-qualified consumer set with to-be-built and spec offerings concentrated in core locations. Especially in volatile markets, this balanced strategy is a valuable differentiator that we believe contributes to greater financial resiliency. As I shared on our last call, the start of the spring selling season had been muted as consumers digested stock market volatility, tariff uncertainty, immigration reform, and high interest rates. As the season progressed, sales trends remained softer than normal with some choppiness throughout the quarter. This drove moderation in our monthly net absorption pace to 2.6 per community. Although this was consistent with our historic second quarter average, it was lower than our expectations in normal market conditions due to increased competitive pressures, especially in first and first move-up locations as well as a pickup in cancellations. In this environment, our overall bias between pace and price leans more heavily towards price and ultimately margin and returns, given the value of our attractive land positions, desirable communities, and discerning customers, especially in our amenity-rich move-up and resort lifestyle neighborhoods. We continue to believe that our emphasis on working with each customer hand-in-hand with our Taylor Morrison Home Funding team to personalize incentives is the most effective way to create value for both our buyers and our company. This process allows us to educate and inform our customers through prequalification and tailor programs that provide stability and strengthen their financial goals and needs during homeownership. We pride ourselves that our mortgage programs are aligned to serve the consumers that most need the support. As an example of just one of our programs that has proven successful in driving traffic and assisting a small subset of customers with their financial goals has been a recently introduced 3.75% conventional 7-year adjustable-rate mortgage with no discount fees. To put the power of such an offer in perspective, this promotional interest rate would increase our typical customers' purchasing power by about $138,000 on a $500,000 home financed with a 20% down payment as compared to financing at market interest rates. The point being assuring that we have a wide range of programs and products to meet each customer's needs continues to be key to our success. Affordability continues to be top of mind for our first-time buyers, while the quality of community and choice remain critical for our other consumer segments, as Erik will detail in just a moment. We are by no means immune from the headwinds facing our industry. However, we believe our strategy of serving well-qualified homebuyers across the consumer spectrum with a well-balanced portfolio of to-be-built and spec homes, primarily in attractive core submarkets where fundamentals tend to be healthier throughout housing cycles provides important benefits, including a more stable gross margin profile. In contrast to significant industry gross margin compression, our adjusted home closings gross margin has been relatively range-bound between 23% and nearly 25% for the last 2.5 years. This is much stronger than our historical average due to the improvement in our scale and operating capabilities. And most importantly, as we look ahead, our gross margin is expected to remain within the bounds of our long-term target in the low to mid-20% range despite the outsized incentive offers and overall pricing pressure we are competing against, especially on spec sales. The prevalence and depth of these incentives have shifted consumer preferences even among traditionally to-be-built customers towards spec homes as some are willing to trade personalization for the deeper incentives currently available for spec inventory across the industry. As a result, our share of spec sales increased in the second quarter to a new high of 71%, including a higher-than-typical 50% in our Esplanade segment. With specs carrying gross margins below that of to-be-built homes, we expect that this temporary mix shift will impact our home closings gross margin in the third and fourth quarter as our margin is expected to moderate sequentially to approximately 22%. However, for the year, our adjusted home closings gross margin is still expected to be approximately 23%. And longer-term, we expect our business to remain more equally balanced between to-be-built and spec home offerings. By consumer group, our second quarter orders consisted of 33% entry-level, 50% move-up, and 17% resort lifestyle. As a reminder, in the first quarter, our overall resort lifestyle segment was the only one to post year-over-year net order growth during its peak selling season, while our move-up sales were roughly stable and the entry level was down most steeply. In the second quarter, we saw more consistent sales activity across the consumer spectrum with our resort lifestyle and entry-level segments both down in the high-teen range, while our move-up sales were down in the mid-single digits driven by a shared lack of urgency due to less confidence. With our broader resort lifestyle portfolio, our Esplanade communities, which account for about 10% of our total, have held up with greater resiliency as we would expect given its affluent customer base. In the second quarter, Esplanade's net sales orders declined just 8% versus 12% in total for the company, and its home closings gross margin was slightly improved year-over-year in the high 20% range. This strong margin is driven in part by outsized combined average lot and option premiums of nearly $270,000, which is 3 times that of the rest of our business. During the quarter, we broke ground on our newest Esplanade in Summerlin outside of Las Vegas, which already has a robust interest list even before we have initiated our first campaign for the community. We remain committed to a robust expansion of this unique brand in the years ahead. Taking a step back from our current sales environment, we believe the need for affordable, desirable new construction remains intact across our markets of operations given the aging of the population, migration patterns, and evolving buyer preferences. We believe that our diverse portfolio is well positioned to serve this need in the years ahead. While the near-term outlook calls for a more patient growth trajectory as we prioritize capital efficiency and returns over volume in today's intensely competitive marketplace, we strongly believe we have the platform and opportunity to jump-start growth as market dynamics stabilize. In the meantime, with a healthy land pipeline already controlled and a healthy balance sheet, we have the flexibility to return capital to shareholders on top of the roughly $2 billion we have invested in share repurchases since 2015. As you would expect, our teams are highly focused on controlling costs and working with our trades to further increase production and purchasing efficiencies, which has driven year-over-year improvement in our stick and brick costs. Additionally, our one-of-a-kind digital sales environment is another source of meaningful cost savings that continues to gain traction and support our healthy SG&A structure. Across the business, our operating priorities are grounded in a disciplined model that we expect can generate mid- to high-teen returns on equity throughout the course of the cycle, including this year. With that, let me now turn the call over to Erik.

Thanks, Sheryl, and good morning. At quarter end, we owned or controlled 85,051 homebuilding lots. Based on trailing 12-month closings, this represented 6.4 years of supply, of which 2.6 years was owned. We control 60% of our lot supply via options and off-balance sheet structures, up from 57% a year ago. We continue to make steady progress towards our goal of controlling at least 65% of lots. During the quarter, we invested $612 million in homebuilding land, 43% of which went towards lot development. For the full year, we continue to anticipate our total homebuilding land investment to be around $2.4 billion with a downside bias given our heightened diligence in these market conditions. As always, our ultimate cash investment will be dependent on our use of financing tools and market opportunities as the land market has recently exhibited some softness. As a reminder, all previously approved transactions as well as future phases of development are re-reviewed by our investment committee for final alignment or any necessary adjustments before closing. We remain committed to executing as a community developer as the vast majority of our prospective customers tell us that they value the community at least as much as the home we provide. While timelines associated with entitlements remain the most notable development challenge, tariffs have not had a meaningful impact on our horizontal costs. In fact, these costs have moderated, and access to trades has eased. We continue to keep a careful eye on competitive and supply measures across our portfolio. Our research suggests that our spec count by community is less than the new home averages in the majority of our markets, which we believe is a function of our core location focus. With regards to resale inventory, there has been some moderation in months of supply across many of our Florida and Texas markets, and the average month of supply for our overall market footprint was lower than the national average. To focus on our consumers for a moment, we've engaged them in attempts to more deeply understand their sentiment. Among our shoppers hesitating, our surveys indicate that their primary concern is the overall environment and less so their own personal financial situations. When market conditions stabilize, we believe this suggests that shoppers will be willing and able to move forward with their desired home purchase. We are pleased that despite a more challenging demand environment, our customer satisfaction scores have increased as we engage with both our shoppers and buyers, validating our efforts in creating a differentiated customer experience. Lastly, I wanted to provide a brief update on our Yardly business. With long-term confidence in positioning this operation to provide an efficient model targeted to address housing availability and affordability challenges by leveraging our core competencies and land and construction, we continue to navigate the interest rate environment and evaluate optimal project disposition strategies. At this time, we now expect to exit as many as 4 communities this year. As detailed in this morning's press release, we have executed a flexible finance facility that will enhance cash generation, balance sheet relief, and greater optionality as we seek to optimize returns over time in targeting asset exits. The magnitude of this facility is material, covering total project costs of $3 billion, serving both existing and new acquisitions. Kennedy Lewis, with whom we have significant land banking experience, will be the capital provider, and we are jointly committed to our unique platform in producing efficient communities that will assist customers who simply cannot afford a new home today but who desire a single-family living experience. With that, I will turn the call to Curt.

Thanks, Erik, and good morning, everyone. For the second quarter, we reported a net income of $194 million, which translates to $1.92 per diluted share, an increase from $1.86 a year ago. When excluding inventory impairments and some warranty charges, our adjusted net income was $204 million or $2.02 per diluted share, up from $1.97 a year ago. Our closings volume rose 4% year-over-year to 3,340 homes, slightly exceeding our previous guidance of around 3,200 due to a higher number of specs sold and closed during the quarter. The percentage of closings coming from specs increased to 65% in the second quarter from 58% in the previous quarter and 59% a year ago. This higher spec penetration resulted in a 2% decline in the average closing price to $589,000, which was slightly above our prior guidance of $585,000. Consequently, home closings revenue grew by 2% to about $2 billion. We ended the quarter with 8,192 homes in production, which included 3,888 specs, of which 842 are finished. Our inventory is slightly elevated compared to targeted levels. As a result, we anticipate our spec closings penetration to stay higher than usual through year-end as we focus on selling these homes and meeting customer preferences for quick move-in options. Additionally, we expect to reduce our starts volume following a monthly pace of 3.4 starts per community, equating to 3,500 homes in the second quarter, which allowed us to set up the homes required for our full-year delivery target. For the remainder of the year, the anticipated slowdown in new starts will be specific to communities as we aim to optimize our working capital and manage our inventory. In support of this reduction in starts, we are seeing improvements in cycle times throughout the building process, realizing over 2 weeks of sequential savings in the second quarter, driven by both to-be-built and spec home production. We believe this continuing improvement enhances our ability to adapt our growth potential as market conditions change. For the full year, we still expect to deliver between 13,000 and 13,500 homes, including 3,200 to 3,300 homes in the third quarter. Based on the expected delivery mix, we now anticipate the average closing price for the year to range between $595,000 and $600,000, with roughly $600,000 in the third quarter. In the second quarter, the gross margin for home closings was 22.3%. The adjusted gross margin, excluding inventory impairments and certain warranty charges, was 23%, aligned with our prior guidance. Looking ahead, we expect incentives to rise, and our spec penetration to remain higher than normal as we work to normalize our inventory position. Therefore, we anticipate our third-quarter gross margin for home closings to be around 22%. Excluding the inventory impairments and warranty charges taken in the first half of the year, we expect our full-year adjusted gross margin for home closings to be around 23%. Including the charges and assuming no additional charges for the rest of the year, we expect our GAAP full-year gross margin for home closings to be about 22.5%. Now regarding sales, we achieved 2,733 net orders, a decline of 12% year-over-year, and our monthly absorption pace dropped to 2.6 net orders per community from 3 a year ago. At the end of the quarter, we had 345 communities, consistent with our prior guidance. Given our updated sales outlook and the timing of community openings and closings, we now expect our ending outlet count to range between 340 and 345 in the third quarter and to reach approximately 350 by year-end. Our cancellation rate was 14.6% of gross orders, up from 9.4% last year. As a percentage of our beginning backlog, cancellations were 9.2%, compared to 5.2% a year ago. Although this increase reflects a recent decline in consumer confidence, we believe it remains below industry averages, demonstrating our strong customer profile, prequalification processes, and customer deposits averaging around $47,000 per home. We reported SG&A expenses as a percentage of home closings revenue at 9.3%, representing a 90 basis points year-over-year expense leverage primarily due to lower payroll and commission costs. For the year, we continue to anticipate our SG&A ratio to improve to the mid-9% range, driven by proactive overhead management, ongoing back-office consolidations, and growing efficiencies from our digital sales tools. Financial services revenue was $53 million, with a gross margin of 51.1%, an increase from $49 million and 42.5% last year. Our financial services team achieved a strong capture rate of 87% during the quarter, effectively managing our incentives. Among buyers utilizing Taylor Morrison Home Funding, credit metrics remained strong and consistent with recent trends, showing an average credit score of 751, a 22% down payment, and a household income of $188,000. As for our balance sheet, we finished the quarter with approximately $1.1 billion in liquidity, which included $130 million in unrestricted cash and $952 million of available capacity on our revolving credit facility. We maintain financial flexibility with a net homebuilding debt to capitalization ratio of 22.9% at quarter-end, with no senior note maturities until 2027. During the quarter, we repurchased 1.7 million shares of our common stock for $100 million. At the end of the quarter, our remaining repurchase authorization stood at $675 million. For 2025, we are now targeting total share repurchases of at least $350 million. Since 2015, we have repurchased approximately $2 billion of our outstanding shares, or about 60%, which has helped drive improved earnings and returns for our shareholders. Moving forward, we remain committed to both programmatic and opportunistic share repurchase strategies to manage our capital and leverage the attractive valuation opportunities in our equity. Including this year’s repurchase target, we expect our diluted shares outstanding to average around 101 million for the full year, with approximately 100 million in the third quarter. Now I will turn the call back over to Sheryl.

Thank you, Curt. In closing, I would like to highlight that we released our annual sustainability and belonging report earlier this week on Monday. This year, the report is built around the theme of resiliency, a term we believe captures not only our financial performance in the face of challenging market dynamics but also the performance of our homes as well as the long-term desirability and livability of our carefully planned, well-located communities. This intentional effort to build resiliency into every facet of our operations is core to who we are as a builder and community developer, as you can read more about in this week's publication. To end, let me express a tremendous thank you to the Taylor Morrison team. I am continually impressed by our team members' execution and enthusiasm to be the best we can be. Thank you to each of you for all you do and all you will do to make the second half of the year a success. Now let's open the call to your questions. Operator, please provide our participants with instructions.

Our first question comes from Matthew Bouley from Barclays.

I would like to start with a question regarding the specification mix for the quarter, which you mentioned is 71% of sales. Is this increase primarily driven by market conditions, particularly a softness in the to-be-built segment, and is it reflective of your strategic choices related to pricing and construction pace? It seems that the spec production at the end of the quarter was fairly consistent with Q1. I'm trying to grasp the reasons behind the rise in specs and whether we should anticipate this level to be maintained going forward, as it appears that's the expectation for the second half. Any additional insights on this would be appreciated.

Mike, thanks, and great question. Matt, sorry, Matt. Relative to the specs, I think last quarter, when we talked about what kind of Q2 was going to be, we kind of set that up that we were going to have a higher spec concentration overall coming through the P&L based on kind of some of where the inventory was throughout all of our communities, whether it was entry-level and/or move-up. And as Sheryl alluded to, even from kind of a resort lifestyle. So it's a function of that. And on a go-forward basis, we still expect that we're going to continue to have a higher concentration of specs coming through here in the near term kind of as we work our way through the year. But going forward beyond that, we continue to kind of be fans of a more balanced kind of approach relative between the mix of our specs and to-be-built.

Yes, Matt, Curt is absolutely correct. The only thing I would add is that what we’re hearing from consumers is crucial. Erik can provide more details, and some of his comments highlighted that buyers have started to recognize the value of inventory homes. In some cases where we typically expect to see a to-be-built buyer, it’s not a one-size-fits-all situation. Some buyers clearly know what they want and are willing to pay differently for it. However, consumers understand the incentives associated with inventory, and they are prioritizing that in their decision-making process. Therefore, we want to ensure we have sufficient inventory in the market to meet this demand.

And just to emphasize quickly, Matt, we've been asking our consumers for years what percentage of shoppers need a specification, have an interest in it, or would be receptive to it. It's been interesting to observe that interest increase over the last couple of quarters. I think, as Sheryl mentioned, this is partly driven by the search for better deals and the economic landscape. We've been trying to align our specification offerings with the demand from our shoppers.

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

Okay. Got it. Yes. No, great color. Helpful. Yes. So a lot of it seems like consumer-driven and you guys making sure you have the right product on the ground for where that demand is. Okay. Super helpful. So then, I guess, secondly, just jumping down to the gross margin side. Just to double-click on that, I mean it sounded like the spec mix was behind the Q3 gross margin guide. I just wanted to check if we're talking 23% adjusted for the full year, is the implication that the fourth quarter is actually expected to be higher than the third quarter within that or roughly flat? Just any kind of detail on the kind of cadence there in the second half.

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

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

Our next question comes from Michael Rehaut from JPMorgan.

I wanted to explore the announcement with Kennedy Lewis regarding the $3 billion facility. The press release mentioned some balance sheet relief and greater optionality, particularly in relation to asset disposition. I'm curious if this agreement will lead to any assets moving off your balance sheet into the facility. Additionally, could you provide more detail on what you mean by greater optionality and whether there's an improvement in the cost of financing for the projects?

Yes, Mike, I'll start with that and good question. I appreciate it. We're really excited about it. As we've mentioned to you in the press release, we've done some business with Kennedy Lewis before. We understand how each other think. And I think this works for both of us. And so to answer one of your questions relative to current assets versus prospective assets, the facility is intended to serve both. And so we do own about 35 assets and a fair number of those are contemplated to move over in the facility in the coming couple of quarters. And then, of course, as we think about new deals, the intention is for those to go into that facility as well. For all intents and purposes, from a functional standpoint, it's akin to a land bank and that we jointly underwrite deals. Kennedy Lewis would be assigned the contract, they would purchase it, and we would pay for a kind of an interest rate along the way. The interesting thing on this one is that it will serve all the way through stabilization of the asset, so through vertical construction. Lastly, on the optionality piece, I would tell you that our job is to basically optimize the value of those assets. And as we think about the competitive arena for each asset in terms of what other assets are available around it, as well as cap rates, where we are from a leasing standpoint, lease rate. And so it just provides a little bit more timing in terms of just having the ability to optimize the value of each asset as we think about the environment and the valuation that the market is telling us.

And Erik, is it accurate to say that for the existing assets, land is usually the smaller component of the total investment? We may not achieve balance sheet relief, but we will receive full support for development, correct?

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

Okay. To clarify, when you mention moving some assets off the balance sheet, are you suggesting that initially it would be a couple of hundred million, which wouldn't significantly impact return on assets or return on equity?

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

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

Yes, thank you, Mike. We are not ready to provide guidance for 2026 yet. However, as mentioned in our Investment Day and previous calls, we expect growth in the coming years. It's important to assess the market carefully to ensure we are making the right decisions regarding our assets. We have the operational capabilities and the team to leverage market opportunities. Our approach to new land expenditures will focus on prioritizing returns based on market conditions. As Erik mentioned, we are still aiming for a maximum of $2.4 billion in land spending. If we have another quarter to evaluate the market's response, and if we see a continued reduction in inventory, it will be easier to discuss 2026 in our next call.

Our next question comes from Trevor Allinson from Wolfe Research.

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

Yes, there are many factors to consider, Trevor. When I think about confidence today, sales rely heavily on consumer confidence in the current environment. It's less about our buyers' financial capabilities, as Erik noted, based on our surveys and macro data. However, we know buyers are looking for deals. In some of our assets, this strategy makes sense given our inventory and the competitive landscape in those local submarkets, where we may choose to accelerate sales despite some costs. Conversely, for other assets, we will exercise patience and avoid discounting. Our portfolio is strong, and as we focus on our active adult and move-up buyers, certain core location assets are irreplaceable, so we won’t be discounting those. Structurally, we believe our long-term pace should be in the low 3s. We did experience a slight slowdown in Q2 for several reasons. Specifically, with our active adult segment, we had some Esplanades delayed due to power issues, which would have actually shown growth year-over-year. It’s important to look closely to understand the situation. When considering our closeouts in the third quarter, which can move more slowly, balanced against our new openings, we are confident about the overall year and our guidance on closures and margins.

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

Yes, Trevor, Erik here. Yes, I think it's both sides. I think on the acquisition side, that was really what we were alluding to with regard to some softness. And as you think about what that looks like over time, it starts with kind of timing and terms in deals and then eventually, it works its way into some of the pricing. And so we have had some success in our underwriting and kind of recalibrating the market and realizing some of that through our acquisition underwriting. We expect that to continue a bit. And really, what we're alluding to is a little bit of a normalization relative to the price inflation that we're seeing in the market. If the long-term trend is something like 10%, that's really been cut in half, you're talking low single digits. On the development side, similarly, I think because development has slowed to some degree across the markets, you're seeing a little bit more access to trades. You're seeing a little bit greater ability to negotiate on those terms. So again, whatever the long-term trend might be in terms of inflation, think about half of that on the development side. So that's really what we're seeing.

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

Yes, which is kind of the norm train, right? It starts...

As markets...

Our next question comes from Mike Dahl from RBC.

My first question is about what you've observed in July so far. Regarding pace, there are various factors at play. Considering that the second half of the year typically experiences a seasonal decline, and given that you just had a quarter significantly below normal seasonal trends, could you clarify whether you expect to maintain a steady pace in the mid-2s? Should we anticipate a further decline? If your closings can leverage some of the backlog and specifications, I’m trying to grasp the near-term pace dynamics and any insights you might have for July.

Yes, we had a good finish to June, even though it started a bit slowly. As we moved into the third quarter, the calendar affected things, and the first week of the month was slow. However, we've noticed an increase in traffic, website activity, and sales, especially during the last week, which was encouraging. These are just early results for the quarter, but I'm optimistic about managing pricing and pace on a community-by-community basis, particularly with our upcoming community openings. Historically, we've seen a decline from Q2 to Q3, and we anticipate that by early August, things will start to normalize as kids go back to school and activities pick up again. It's still a bit too soon to comment on the overall trends for August and September.

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

Curt discussed our expectations for pricing for the remainder of the year, and you're right that even though it was slightly better than our guidance, it was primarily a mix issue, both by geography and product type. Remember, we have a more widespread inventory across all consumer categories, but much of it targets first-time buyers at lower price points. For instance, in the active adult segment, particularly in Sarasota, Florida, we saw strong interest in townhomes, which are priced lower than our typical resort lifestyle or Esplanade offerings. This situation is influenced by multiple factors contributing to the overall pricing. Regarding Indianapolis, we experienced a full quarter there this year compared to just nine weeks last year, and it's mainly a first-time buyer market for us. The positive news is that Indianapolis saw its pace double year-over-year, which is encouraging, but it's also going to impact the average selling price.

Next question comes from Alan Ratner from Zelman & Associates.

First question on the cancellation rate. I don't want to exaggerate the situation since it's still a fairly strong overall level. However, you mentioned it as a slight downturn this quarter and an increase compared to last year. I'm interested in more details about the cancellations, especially considering the substantial deposit you require. Generally, in a build-to-order business, while it's shrinking, that typically reduces cancellations. At what stage are these cancellations occurring? What price points or market specifics are involved? Any additional insights to help understand the driving factors would be appreciated.

Yes, that's a fair question. We did mention it, Alan. It’s challenging to identify a company-wide trend. To start, you're right. Our cancellation rate has increased slightly from quarter to quarter, which is higher than what we've observed in the past couple of years. However, in comparison to the industry, I would say it is still relatively low. Looking across the regions, the trends are fairly consistent, with Central seeing a slight decline. The most common reasons for cancellations were not due to financing issues but rather cases where homes that needed to close fell through, homes we had to push out of contract because they didn’t sell, and situations where relocation changes impacted buyers. Additionally, there were instances where buyers were under contract for a while but then found a much better deal nearby and chose to walk away from their deposit. There wasn't a single, obvious trend across the entire portfolio. If I had to highlight one, it would likely relate to existing homes. For move-up buyers, most need to sell their current home, but not all of them do.

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

Generally, yes. It depends on whether they wrote it as a contingency. We accept a limited number of contingencies per community. If we take a contingency, we thoroughly review their existing listing and how they have positioned it in the market. Sometimes they may have a 30-day contingency that eventually gets released. I would say if it doesn't meet the guidelines, we keep the deposit. We have a clear policy on that. I should also mention that we encourage them to return within 12 months, and we will reapply the deposit, but we would retain it otherwise.

That makes sense. For my second question, I'm returning to the topic of 2026. I understand you won’t provide guidance for that year, and I’m not asking for future projections. I’m just interested in your guidance for the rest of this year. Many of your closings are coming from your speculative inventory, and your backlog is down about 30% year-over-year. It seems likely to finish the year at a similar level if the business mix remains heavy on specs. You mentioned you're reducing starts at this time, which I understand. As you consider next year's spring selling season, is there a point where, assuming you successfully clear the specs and meet your closing guidance, you would reassess your start pace and consider reaccelerating to show growth in 2026?

Yes, it will depend on market conditions. However, we will focus on our new Esplanade openings and some of our new move-up positions to potentially speed up our to-be-built business, as we typically start the new year with a strong to-be-built backlog. This will remain a priority for us. As we progress with these specs, we will definitely replace them in the right locations where consumers need inventory. It's essential to ensure they are situated correctly and that we understand the broader economic context. Given the current environment and based on consumer feedback, which indicates a preference for inventory, we will continue to replace these units, but at a very responsible pace.

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

I wanted to ask about the absorption pace for move-up homes compared to entry-level and resort lifestyle properties. Can you discuss the margins or incentives across these segments and any changes you have noticed?

Yes. I would say that when you think about incentives, the way I would look at it is we can certainly talk about it by consumer group, but your most expensive incentives are going to go with finished inventory because that's probably where we will focus on forward commitments and those permanent buydowns. We've talked in the past about our buy build and some of our other proprietary programs where on a to-be-built or an earlier spec where we can assure a consumer a below market rate, those aren't quite as expensive. The only thing that I would point out is somewhat different from the norm is with the resort lifestyle buyer, many of them don't take mortgages or they take very small ones. So our incentives there might be more focused on a percentage of options that they buy or if they buy this many, we'll give them a percentage off. But that would really be the exception. And generally, as we've talked about, everything else is really tailoring that right promotion. But the further you get down to a completed inventory home, the more expensive your incentive is.

That's helpful. When we consider the third quarter back half margin guidance compared to the second quarter, could you provide some insight into the higher incentive level and mix impact? Specifically, how much of the decline is attributed to each of those factors?

Yes, Rafe, I would say that the majority of it is going to be on the spec penetration and maybe some mix. But as we alluded to kind of in our prepared comments, most of it's predicated on kind of the increase of our spec penetration that is resulting in kind of in that kind of step down from a margin standpoint. A minimal impact from a mix perspective. We are seeing a little bit higher sales price mix for the rest of the year with some higher-priced communities kind of getting closings or increased closings in kind of our Western segment, but most of it is going to be as a result of the increase in our spec penetration and the resulting incentives associated with that.

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

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

I am curious about the Florida buyers. I know you spent a lot of time there during your Investor Day and asked the same question recently. Can you share what percentage of the active adult buyers in Florida for those homes are typically from Florida? Are most of your active adult buyers in Florida coming from out of state?

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

It’s also seasonal. During the peak season, most of our buyers come from out of state. However, as the summer months progress and we move into the shoulder season, we see more buyers from within the state. Based on yesterday's call, I agree with what was discussed. Our Florida buyers come from various regions, including the West Coast, internationally, and the East Coast. There is a strong interest in living in Florida throughout the state, and we remain optimistic about the market there.

Excellent. When you mention 71% specification, could you clarify what you mean by spec? Are you referring to intra-quarter order closings? Also, how does that 71% compare to the previous quarter and the same quarter last year?

Yes. The 71% that Ken mentioned refers to the percentage of spec sales in the quarter. A year ago, that was likely in the mid-60s.

So that was higher. Additionally, our penetration of what we sold in the quarter was also higher, making both metrics exceed historical norms.

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

Great. How is that different from the intra-quarter orders that were closing? That's traditionally how I think about spec. What is that metric if you have it available?

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

Our next question comes from Jay McCanless from Wedbush.

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

Yes, certainly. As I said, I talked a little bit already, I think, about Esplanade. If I start with kind of the Southeast, Jay, that remained quite strong throughout the quarter. We saw year-over-year sales improvement in our Carolina and Atlanta markets. I've already talked a little bit about Indy. When I moved to Florida, it's a little bit of a mixed story. Our Orlando business, which is our largest Florida business had a nice year-over-year increase in sales. And that was fueled by some community count growth and a very modest reduction in pace. But I think most importantly, when I think about Orlando, it's their mix of communities is shifting from what we've had the last year or 2 to a more balanced book of consumer groups away from just exclusively first-time buyers, which will continue to improve sales, margins, and returns. Sarasota also saw a nice improvement in pace, and I think did a nice job reducing their inventory. But as I mentioned before, we saw a pretty townhome penetration in Esplanade, which is unusual for us, but it did moderate their ASP and brought down even as high as our upgrades were brought down the typical upgrades for the quarter. I guess before I leave Sarasota, I did mention that we had that new Esplanade opening with just a great interest list in Q3. So that we had planned to open last quarter. So very excited about that when I look at the interest. Jack's also had a nice sales growth from both community count and pace expansion. You can hear a trend here. We're also very excited to open our first Esplanade there in St. Mary's, and that will be in the first quarter. That one also has a nice interest list. And then I would tell you Tampa was probably the only market where we saw some real softness in the quarter in our paces. We saw higher cans than normal and that was predominantly in our first-time buyer. Good news is across the state, Jay, we saw resale inventory month of supplies reduced in almost all our markets.

Shifting to the West, we learned from some competitors yesterday that Northern California might be experiencing some tech job losses or concerns. What are you hearing from the field in that area? How are you approaching this situation? I understand your community mix is relatively balanced between Northern and Southern California, so any insights you can provide on both regions would be appreciated.

Yes. For us, I'd say a little different. I mean we've been talking with the Street, with you Jay for a while about lightening our capital investment, particularly in SoCal and reducing our community exposure. So the communities that we have in SoCal, I would tell you, are performing well above the company average on absorption. But the fact that community count down, which was quite intentional as we reallocated funds to other markets, it has created some drag on total sales in the West. If I head up to Northern Cal, I would describe Sacramento as stable with relatively consistent community and paces. Our Bay business was flat on sales year-over-year. It's interesting because our cans in the Bay, and maybe this goes back to one of the earlier questions I got, we were actually below the company average, even with all the tech noise we're seeing. And I would tell you, have moderated quite a bit since the back half of last year. So for us, the base sales only being flat had to do with open communities. We have 3 new communities that just opened at the end of the quarter. I'm excited about those because that will help grow the balance of the year. It's our only market with an ASP over $1 million. So you would expect some cautiousness with their equity in a tech market like that. But honestly, it's been pretty good overall.

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

You're addressing the active adult buyer who is more sophisticated. It's understandable that they want to ensure they are getting a good deal in the marketplace and that they are being a bit more cautious while considering how the broader economic factors impact them. They do have the financial means, and it's not a lack of funds that keeps some people on the sidelines. Erik, do you have any other specific insights from the research to add?

No, it's really interesting. I think it relates back to the interest in specifications and searching for incentives. Everything is interconnected, and it really comes down to sentiment. In our prepared remarks, we presented this as a positive because fixing your financial situation is much more challenging. It’s really about the media and the sentiment that seems to be affecting people's willingness to shop.

To make decisions and we'll see in some time what happens. But I would highlight the significant benefits of the temporary lift on the SALT deduction cap and the permanence of the $750 million for mortgage interest, which will now not expire. I believe these factors will benefit consumers. Much of this has been uncertain for a while. Clearly, mortgage insurance deductions will likely appeal more to entry-level buyers. As these issues are resolved and become clearer to consumers, along with some confidence in future interest rates, all of this will start to influence their decisions.

Since you mentioned it, I want to ask a question that I was planning to save for the next earnings call. With the increase in the SALT cap, have you considered how much it might benefit people? I assume this topic will be on everyone's minds, so I thought I'd bring it up now.

Yes. At this point, I can't quantify the impact for you. It's primarily California that will be affected, and it will definitely have a positive effect. However, I believe the main factor relates to confidence. They won’t decide to make a purchase just because of the SALT cap, but its presence in the equation is beneficial. We're assessing it based on the overall price point. Considering the Bay price with an average selling price of $1 million, there will certainly be an advantage. While it may not resolve some of the confidence challenges they face, I think it is certainly helpful.

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

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

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

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