Taylor Morrison Home Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2025

Key Takeaways

  • Positive Sentiment: Taylor Morrison delivered strong Q2 results with 3,340 home closings at an average price of $589,000, generating $2 billion in revenue and a 23% adjusted home closings gross margin.
  • Negative Sentiment: A record‐high 71% share of spec home sales led to margin pressure, as deeper incentives on inventory are expected to push Q3 and Q4 home closings gross margins down toward 22%.
  • Positive Sentiment: The company controls 85,051 homebuilding lots (6.4 years of supply) with 60% via options and finished Q2 with $1.1 billion in liquidity and a 22.9% net homebuilding debt‐to‐capitalization ratio.
  • Positive Sentiment: Taylor Morrison repurchased $100 million of shares in Q2 and targets at least $350 million more in 2025, bringing total buybacks since 2015 to ~$2 billion to enhance shareholder returns.
  • Positive Sentiment: The upscale Esplanade active‐adult brand continues expanding, breaking ground on a new Summerlin community that already boasts a robust interest list ahead of its launch.
AI Generated. May Contain Errors.
Earnings Conference Call
Taylor Morrison Home Q2 2025
00:00 / 00:00

There are 7 speakers on the call.

Speaker 4

Ladies and gentlemen, the Taylor Morrison Q2 2025 earnings webcast and conference call will begin shortly with your host Mackenzie Aaron. We appreciate your patience as we prepare your session today. During the call, we encourage participants to raise any questions they may have. You can raise a question by pressing star followed by one on your telephone keypad, and to remove the line of questioning, press star followed by two. As a reminder, to raise a question, press star followed by one. We will begin shortly.

Speaker 4

SA.

Speaker 4

Good morning and welcome to Taylor Morrison Home Corporation's second quarter 2025 earnings conference call. Currently, all participants are in listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I'd now like to introduce our host, Mackenzie Aaron. Please go ahead.

Speaker 2

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.

Speaker 2

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.

Speaker 2

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 return.

Speaker 2

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 pre-qualification 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.

Speaker 2

To put the power of such an offer in perspective, this promotional interest rate would increase our typical customer's 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 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.

Speaker 2

However, we believe our strategy of serving well-qualified home buyers 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 two and a half 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.

Speaker 2

Despite the outsized incentive offers and overall pricing pressure we are competing against, especially on spec sales, the prevalence and depth of these incentives has shifted consumer preferences even among traditionally to-be-built customers towards spec homes, as some are willing to trade personalization for the deeper incentives currently available for spec inventory across the industry. As a result, our share of spec sales increased in the second quarter to a new high of 71%, including a higher than typical 50% in our Esplanade segment. With specs carrying gross margins below that of to-be-built homes, we expect that this temporary mix shift will impact our home closings gross margin in the third and fourth quarter, as our margin is expected to moderate sequentially to approximately 22%.

Speaker 2

However, for the year our adjusted home closings gross margin is still expected to be approximately 23%, and longer term we expect our business to remain more equally balanced between to-be-built and spec home offerings. By consumer group, our second quarter orders consisted of 33% entry level, 50% move up, and 17% resort lifestyle. As a reminder, in the first quarter our overall resort lifestyle segment was the only to post year-over-year net order growth during its peak selling season, while our move up sales were roughly stable and the entry level was down most deeply.

Speaker 2

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, three times that of the rest of our business.

Speaker 2

During the quarter we broke ground on our newest Esplanade in Summerlin outside of Las Vegas, which already has a robust interest list. Even before we have initiated our first campaign for the community, we remain committed to a robust expansion of this unique brand in the years ahead. Taking a step back from our current sales environment, we believe the need for affordable, desirable new construction remains intact across our markets of operations. Given the aging of the population, migration patterns, and evolving buyer preferences, we believe that our diverse portfolio is well positioned to serve this need in the years ahead. While the near-term outlook calls for a more patient growth trajectory as we prioritize capital efficiency and returns over volume in today's intensely competitive marketplace, we strongly believe we have the platform and opportunity to jumpstart growth as market dynamics stabilize.

Speaker 2

In the meantime, with a healthy land pipeline already controlled and healthy balance sheet, we have flexibility to return capital to shareholders on top of the roughly $2 billion we have invested in share repurchases since 2015. As you would expect, our teams are highly focused on controlling costs and working with our 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 SGA 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 a cycle, including this year. With that, let me now turn the.

Speaker 1

Call over to Erik. Thanks Sheryl and good morning. At quarter end we owned or controlled 85,051 homebuilding lots based on trailing twelve 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.

Speaker 1

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 to our horizontal costs and 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.

Speaker 1

There has been some moderation in months of supply across many of our Florida and Texas markets and the average months of supply for our overall market footprint was lower than the national average. To focus upon our consumers for a moment, we've engaged them in attempts to more deeply understand their sentiment among our shoppers hesitating. Our surveys indicate that their primary concern is the overall environment and less so their own personal financial situations. When market conditions stabilize, we believe this suggests that shoppers will be willing and able to move forward with their desired home purchase. We are pleased that despite a more challenging demand environment, our customer satisfaction scores have increased as we engage with both our shoppers and buyers, validating our efforts of creating a differentiated customer experience.

Speaker 1

Lastly, I wanted to provide a brief update on our for-rent Yardly business with long-term confidence in positioning this operation to provide an efficient model targeted to address housing availability and affordability challenges. By leveraging our core competencies in land and construction, we continue to navigate the interest rate environment in evaluating optimal project disposition strategies at this time. We now expect to exit as many as four 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 and in targeting asset exits. The magnitude of this facility is material, covering total project costs of $3 billion, serving both existing and new acquisitions.

Speaker 1

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.

Operator

Thanks, Erik, and good morning, everyone. For the second quarter, reported net income was $194 million, or $1.92 per diluted share, up from $1.86 a year ago. After excluding inventory impairment and certain warranty charges, our adjusted net income was $204 million, or $2.02 per diluted share, up from $1.97 a year ago. Our closings volume increased 4% year over year to 3,340 homes, slightly ahead of our prior guidance of approximately 3,200 due to a higher number of specs that were sold and closed during the quarter. The share of closings from specs increased to 65% in the second quarter from 58% in the prior quarter and 59% a year ago. This higher spec penetration contributed to a 2% decline in the average closing price to $589,000. This was slightly ahead of our prior guidance of $585,000. As a result, home closings revenue increased 2% to approximately $2 billion.

Operator

With 8,192 homes under production at quarter end, including 3,888 specs, of which 842 are finished, our inventory remains slightly elevated compared to targeted levels. Therefore, we expect our spec closings penetration to remain higher than normal through year end as we prioritize the sale of these homes and meet recent customer preferences for quick move-in homes. We also expect to slow our starts volume following a monthly starts pace of 3.4 per community, or 3,500 homes in the second quarter, which allowed us to put the universe of homes in the ground for a full year delivery target for the remainder of the year. The expected slowdown in new starts will be community specific as we look to optimize our working capital and manage our inventory. Also in support of reduced starts volume, we continue to see improvement in cycle times throughout the build process.

Operator

We realized more than two weeks of sequential savings in the second quarter driven by both to-be-built and spec home production. We believe that this ongoing improvement strengthens our ability to flex our growth potential as market conditions evolve. For the full year, we still expect to deliver between 13,000 to 13,500 homes, including between 3,200 to 3,300 homes in the third quarter. Based on the anticipated mix of deliveries, we now expect the average closing price to be in the range of $595,000 to $600,000 for the full year, including approximately $600,000 in the third quarter. In the second quarter, home closings gross margin was 22.3%. Adjusted home closings gross margin, which excludes inventory impairment and certain warranty charges, was 23%, in line with our prior guidance.

Operator

As we look into the remainder of the year, we expect incentives to increase and our spec penetration to remain higher than typical as we continue to normalize our inventory position. As a result, we expect our third quarter home closings gross margin to be approximately 22%, excluding the inventory impairment and warranty charges realized in the first six months of the year. We expect our full year adjusted home closings gross margin to be approximately 23%, including the charges and assuming no additional charges through the remainder of the year. We expect our GAAP full year home closings gross margin to be approximately 22.5%. Now to sales, we generated 2,733 net orders, down 12% year over year as our monthly absorption pace moderated to 2.6 net orders per community from 3 a year ago. At quarter end, we had 345 communities, consistent with our prior guidance.

Operator

Based on our updated sales expectations and timing of community openings and closings, we now expect the ending outlet count to be between 340 to 345 in the third quarter and approximately 350 by the end of the year. Our cancellation rate was 14.6% of gross orders, up from 9.4% a year ago. As a percentage of our beginning backlog, cancellations were 9.2%, up from 5.2% a year ago. While this increase reflects the change in consumer confidence of late, we believe this remains below industry average, reflecting our strong customer profile, pre-qualification processes, and backlog. Customer deposits of approximately $47,000 per home. SGA expense as a percentage of home closings revenue was 9.3%. This represented 90 basis points of year over year expense leverage due primarily to lower payroll related costs and commission expense for the year.

Operator

We continue to expect our SGA ratio to improve to the mid 9% range due to proactive management of our overhead costs, ongoing back office consolidation efforts, and growing efficiencies from our digital sales tools. Financial services revenue was $53 million with a gross margin of 51.1%, up from $49 million and 42.5%, respectively, a year ago, helping to manage our incentives effectively. Our financial services team achieved a strong capture rate of 87% during the quarter among buyers using Taylor Morrison Home Funding. Credit metrics were healthy and consistent with recent trends, with an average credit score of 751, down payment of 22%, and household income of $188,000. Turning now to our balance sheet, we ended the quarter with liquidity of approximately $1.1 billion. This included $130 million of unrestricted cash and $952 million of available capacity on our revolving credit facility.

Operator

We continue to have financial flexibility with our net homebuilding debt to capitalization ratio equaling 22.9% at quarter end and no senior note maturities until 2027. During the quarter, we repurchased 1.7 million shares of our common stock outstanding for $100 million at quarter end. Our remaining repurchase authorization was $675 million for 2025. We are now targeting total share repurchases of at least $350 million. Since 2015, we have repurchased a total of approximately $2 billion of our shares outstanding, or roughly 60%, helping to drive improved earnings and returns for our shareholders going forward. We remain committed to both programmatic and opportunistic repurchase strategies to manage our capital and take advantage of the attractive valuation opportunity in our equity. Inclusive of this year's repurchase target, we expect our diluted shares outstanding to average approximately 101 million in the full year, including 100 million in the third quarter.

Operator

Now I will turn the call back over to Sheryl.

Speaker 2

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.

Speaker 2

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.

Speaker 4

Thank you. We'd like to open the lines for Q and A. If you'd like to ask a question, please press Star followed by 1 on your telephone keypad. To remove yourself from the line of questioning, press Star followed by 2. As a reminder, to raise a question, press Star followed by 1. Our first question comes from Matthew Bouley from Barclays. Matthew, your line is now open.

Speaker 2

Good morning, everyone.

Speaker 6

Thank you for taking the questions. I guess I'll start with a question on the spec mix in the quarter. That's 71% of sales I think you said. My question is that kind of like a market driven, I don't know, softness on the to-be-built side kind of increasing that spec mix. Therefore, sort of your own decisions around price over pace with the to-be-built side. It seemed like the spec production at the end of the quarter was not too different versus Q1. I'm just trying to understand the reasoning behind that jump in spec, and then obviously going forward should we expect it to kind of stay at these levels? It sounded like that's what was expected in the second half. Just any more detail on that? Thank you.

Operator

Yeah, hi Mike. Thanks and great question, Matt. Sorry Matt. Yeah, 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. 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 as we work our way through the year.

Operator

Going forward beyond that, we continue to kind of be fans of a more balanced kind of approach relative between the mix between our specs and to-be-built.

Speaker 2

Yeah, and I think Matt Kirk's exactly right. The only thing I'd add to it is it absolutely is a function of what we're hearing from the consumer. You know, Erik can go into more detail, and I think some of his comments articulated that the buyer has really begun, the consumer has really begun to understand the value proposition that's available with inventory homes, even in some instances where we would generally expect to see a to-be-built buyer. It's not one size fits all; some to-be-built buyers absolutely know what they want and are willing to pay for it a little differently. The consumer understands the incentive environment that's sitting with inventory, and they're prioritizing that in their decision process. We want to make sure we have the inventory in the market to.

Speaker 1

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

Speaker 2

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 was a smaller piece of that business.

Speaker 2

Okay, got it.

Speaker 6

Yeah, no, great.

Operator

Color helpful.

Speaker 6

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.

Speaker 1

Okay, super helpful.

Speaker 6

I guess secondly, just jumping down to the gross margin side just to double click on that. 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, you know, roughly flat? Just any kind of detail on the kind of cadence there in the second half?

Speaker 6

Thank you.

Operator

Yeah. 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. 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'll be approximately 22%, roughly speaking, in Q4.

Speaker 2

You probably 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.

Speaker 6

Understood.

Speaker 3

Perfect.

Speaker 6

Thank you everyone and good luck.

Speaker 2

Thank you, Matt.

Speaker 4

Thank you very much. Our next question comes from Michael Rehaut from JPMorgan Chase & Co. Michael, your line is now open.

Speaker 3

Great, thanks. Good morning, everyone. Thanks for taking my questions. Delve a little bit into the announcement with Kennedy Lewis regarding the $3 billion facility. The press release cited some balance sheet relief and greater optionality, specifically, I guess, in terms of disposition of assets. I'm kind of curious if this agreement is going to result in some movement of assets off of your balance sheet into the facility, or if you could just go into a little more detail in terms of what you mean by greater optionality and if there's an improvement in perhaps cost of financing for the projects.

Speaker 3

Yeah.

Speaker 1

Hi, Mike. I'll start with that. Good question. Appreciate it. We're really excited about it. As we've mentioned 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. To answer one of your questions, relative to current assets versus prospective assets, the facility is intended to serve both. We do own about 35 assets and a fair number of those are contemplated to move over in the facility in the coming couple quarters. 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 function standpoint, it's akin to a land bank in that we jointly underwrite deals.

Speaker 1

Kennedy Lewis would be assigned the contract, they would purchase it and we would pay for a kind of an interest rate along the way. The interesting thing on this one is that it will serve all the way through stabilization of the asset through vertical construction. Lastly, on the optionality piece, I would tell you that our job is to basically optimize the value of those assets as we think about the competitors 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. It just provides a little bit more timing in terms of having the ability to optimize the value of each asset as we think about the environment and the valuation that the market's telling us.

Speaker 2

Erik, is it fair that on the existing asset, you know, land tends to be the smaller piece of the overall investment? We won't get the, even though we'll move and we won't necessarily get the balance sheet relief, but we'll get all the support on the development side.

Speaker 1

Right, very true. Typically, the land burden as a percentage of the total revenue for these assets is a little bit lighter. To 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 landing. It's not going to be a huge dollar amount.

Speaker 4

Day one.

Speaker 3

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

Speaker 1

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

Speaker 3

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

Speaker 2

Yeah, Mike, thank you. Obviously, you know, we have not, we are not ready to guide for 2026, but I think as we have implied in our investment day and our last couple calls, you know, we continue to expect growth in each of the out years. Having said that, you know, and I think I said in my comments, you know, we really want to look at the market and make sure that we do the right thing on every single asset. We certainly have the operational capabilities, we have the team to take what the market gives us. The way we look at new land spend as we continue to prioritize returns is really going to be based on the market. You know, as you heard from Erik, we still are guiding to something no more than $2.4 billion in land spend.

Speaker 2

As we sit here today, I think you give us another quarter to understand how the market's responding. If we continue to see a reduction in inventory, I think it will be a lot easier in our next call to talk more about 2026.

Speaker 3

Great, thanks so much.

Speaker 2

Thanks, Mike.

Speaker 4

Thank you very much. As a reminder, to raise a question, please press star followed by one, and to remove yourself from the line of questioning, press star followed by two. Our next question comes from Trevor Allinson from Wolfe Research LLC. Trevor, your line is now open.

Speaker 1

Hi, good morning. Thank you for taking my questions. Sheryl, I wanted to follow up on that last comment. Thinking about prioritizing price and margin here in the current environment, how should we think about your willingness to slow pace further from here if demand were to remain soft? As we enter a seasonally slower coming year, is there a lower bound on absorption pace that you would not like to dip below if demand were to remain soft?

Speaker 2

Yeah, I think there's a lot of factors that go into that, Trevor. Obviously, if I think about confidence today, sales are all about confidence. With the consumer in today's environment, it's not really about the financial capabilities of our buyers. Erik pointed out from what we're seeing in our surveys and in the macro data, but we do know the buyers want a deal and in some of our assets that's going to make a lot of sense. Where we have inventory and we look at the competitive environment in that local submarket, there are some places where we're going to move pace and there will be a cost to do that. Having said that, there are other assets that honestly we will be very patient and we're not going to put them on sale.

Speaker 2

We have a very strong book of assets and as we move to our active adult and our move up buyers, some of those assets in more core locations become very difficult to replace and we're not going to put those on sale. We've said that structurally we think our paces should be somewhere long term in the low three. Obviously, we saw a little bit of a reduction in our pace in Q2. There are a couple of reasons. I look at our active adults specifically and we had a couple Esplanades push out because of power issues that would have had our Esplanade business actually up year over year. You actually have to peel back the onion to really understand it.

Speaker 2

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

Speaker 1

Okay, thank you for that Sheryl. That was very helpful. Switching over to the cost side, a peer of yours yesterday was talking about potentially seeing some relief on development costs. In your 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 when do you expect to potentially see some of that benefit start to come through? Thanks.

Speaker 4

Yeah.

Speaker 1

Hey, Trevor, Erik here. 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. As you think about what that looks like over time, it starts with kind of timing and terms and deals, and then eventually it works its way into some of the pricing. 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. 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, low single digits on the development side.

Speaker 1

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. Whatever the long term trend might be in terms of inflation, think about half of that on the development side. That's what we're really seeing.

Speaker 2

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.

Speaker 3

Yeah.

Speaker 1

Which is kind of the normal, the normal train.

Speaker 1

Right.

Speaker 2

It starts as markets.

Speaker 1

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

Speaker 2

Yeah.

Speaker 1

Very helpful. Thanks for all the color and good luck moving forward.

Speaker 2

Thanks, Trevor.

Speaker 4

Our next question comes from Michael Dahl from RBC Capital Markets. Mike, your line is now open.

Operator

Good morning.

Speaker 1

Thanks for taking my questions. Hey Mike, my first question, I just wanted to go back to Trevor's question, maybe trying to put a finer point on things. Can you talk about what you've seen in July so far, and to the point on pace, there are moving pieces, but given the back half is normally seasonally lower, yet you're just coming off a quarter that was well below normal seasonal trends. Can you help us understand? Do you think you'll hold pace flattish in the mid two? Should we still expect a further drop off your closings? You can hit with some of the backlog and specs, but just trying to understand that near term pace dynamic, and I need a lot of comments.

Speaker 2

Yeah, as we had a nice finish to June and June started a little slower. Nice finish, I would say as we rolled into the third quarter, Mike, the holiday, the way it fell on the calendar, I would tell you the first week of the month was slow. We have seen a pickup in traffic and website activity and sales activity. Had a last week, a nice week. Early results into the quarter obviously, but I think our perspective on managing price and pace on a community by community asset holds. With our community openings, I like to think we'll be somewhere in a similar place. If I look historically, generally we do see a fall off from Q2 to Q3. We also expect early August, you start getting some normalcy back into this, the seasonality with kids back in school and normalized activity.

Speaker 2

A little early to comment on kind of the macro with August and September.

Speaker 1

Okay, fair enough. Just sticking with the price versus pace dynamic, it makes sense. I hear what you're saying. Your order ASP was still down quite a bit since some of that is mix related. When we think about the order ASP and how you're managing that pace versus price dynamic, any color on whether that side should start to stabilize a little bit? We're down 5% quarter on quarter, 6% year on year. Any help on that would be good.

Speaker 2

I mean, Curt shared kind of our expectations for price for the balance of the year. You're absolutely right, it was, even though it was a little bit ahead of our guidance, it really was a mix issue and both a geographic mix issue as well as a spec penetration as much as anything. Mike, remember that we have made some comments that we've got inventory more universally across all consumer groups, but the majority of that inventory is always going to address that first time buyer and that's just at a lower price point. Even when I look at the active adult penetration, specifically a couple positions in Florida, Sarasota specifically, we had some strong townhome penetrations which had a lower price than our normal resort lifestyle or Esplanade. Not just one thing, but I think all of those contributed to the overall price.

Speaker 2

Did I miss—oh, and then Indy, you had this really fair, Curt. We had a full quarter of Indy, which is primarily Indianapolis, which is primarily a first time buyer market for us so far. You think about last year we had nine weeks in the quarter. This year we had a full quarter at that penetration. Good news is when I look at the Indianapolis results, their pace doubled year over year. It's a good result, but it absolutely is going to have an impact on the ASP.

Speaker 1

Okay, thank you.

Speaker 2

Thanks, Mike.

Speaker 4

Thank you very much. Next question comes from Alan Ratner from Zelman & Associates LLC. Alan, your line is now open.

Speaker 1

Hey guys, good morning. Thanks as always for the great detail.

Speaker 1

Really appreciate it. Good morning. First question on the cancellation rate. I know I don't want to make a mountain out of the molehill here because it's still a pretty healthy overall level, but you did flag it as kind of something that was a bit of a downward surprise in the quarter and up year over year. Was just curious if you can give a little bit more color on these cancellations because I know you guys take a pretty hefty deposit. Generally with the build order business, although it's shrinking, that tends to mitigate some of the cancellations. At what stage are you seeing these cancellations? At what price point? Market specifics, maybe any additional color you can give to understand what's driving that would be great.

Speaker 2

Yeah, it's a really fair question. We did highlight it, Alan. You know, it's hard to find a company-wide trend. Let me start there. Actually, where I'll start is you're absolutely right. When you look at our can rate, I think the flag is it's up, you know, quarter over quarter, a little higher than we've seen in a couple years, right? Still, as far as the industry goes, I would say honestly quite low. When I look across the regions, you'll see relatively consistent, maybe Central being down just a bit. If I were to point to the most prevalent, it actually wasn't getting financed. It was actually in a number of situations. It was a home to close that maybe fell out, a home to sell that maybe we pushed out of contract because they didn't sell it and we're not going to sit on inventory.

Speaker 2

We had some situations with reloads changing. We had some situations where honestly a buyer was in contract for a little bit longer and then they, you know, across the street find a ridiculous deal of an incentive and it's easy to walk away from the deposit. There wasn't one, I would say, obvious trend across the entire portfolio. As I said, if I had to point to one, it would probably be on their existing home. When you think about our move-up buyer, most of them need to sell their existing home, but not all of them.

Speaker 2

That's really helpful. I have a separate question, 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?

Speaker 2

Generally, yes. It depends on one, did they write it as a contingency? We only take a certain number of contingencies by community. If we're going to take a contingency, we're going to really scrub their existing listing and understand how they've positioned it in the marketplace. Sometimes they'll have a 30-day contingency and then that gets released. I would say unless it falls within the, I mean if it doesn't fall within the guidelines, we do keep the deposit and we have a pretty black and white line on that.

Speaker 2

Got it.

Speaker 2

Actually, the only thing I'd add to that is we do consent them, Alan, to come back within 12 months and we'll reapply the deposit. We would keep it.

Speaker 2

That makes sense. All right, second question, I guess circling back to 2026 and I know you're not going to give any guidance there and I'm not looking forward, but I'm just curious if you think about the guidance for the remainder of this year. Obviously a lot of these closings are coming from your spec inventory. You know your backlog today is down about 30% year over year. It's probably going to end the year in a pretty similar spot, assuming the mix of business stays elevated at specs. You flagged you're pulling back on starts right now, which I understand.

Speaker 2

As you think about next year's spring selling season, is there a point where, assuming you're successful in clearing through these specs and delivering the closing guidance, is there a point where you're going to look at your start pace and say we really need to reaccelerate things if we want to show growth in 2026?

Speaker 2

Yeah, it's all going to be dependent on market conditions, Alan. Of course, I mean we're going to really be focused also with our new Esplanade openings and some of our new move up positions to, you know, where it's possible to accelerate our to-be-built business. Right. That's generally what we come into the new year with, a strong to-be-built backlog. That will continue to be a priority for the business. As we move through these specs, we absolutely will replace them. We'll do them in the right locations where the consumer wants inventory. We have to make sure that the consumer, you know, that they're in the right places and understand kind of the macro.

Speaker 2

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

Speaker 2

Got it. Appreciate that. Thank you, guys. Good luck.

Speaker 2

Thank you.

Speaker 4

Thank you very much. As a reminder, to raise a question, use star followed by one. To remove yourself from the queue, use star followed by two. Our next question comes from Rafe Jadrosich of BofA Securities. Rafe, your line is now open.

Speaker 1

Hi, good morning, it's Rafe. Thanks for taking my question. I wanted to ask, you spoke about the absorption pace on the move up versus entry level versus resort lifestyle. Can you talk about the margins or incentives by segment? Have you seen any changes there?

Speaker 2

Yeah, 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 buy downs. 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 as somewhat different from the norm is with the resort lifestyle buyer, many of them don't take mortgages or they take very small ones.

Speaker 2

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. That would really be the exception. Generally, as we've talked about, everything else is really tailoring that right promotion. The further you get down to a completed inventory home, the more expensive your incentive is.

Speaker 1

Okay, that's helpful.

Operator

When we look at the.

Speaker 1

Third quarter back half margin guidance relative to where you were in the second quarter, can you, just between the higher incentive level and mix impact, give us some color on each of those pieces? Maybe, like, how much of the step down is from each of those?

Operator

Yeah, Rafe, I would say that the majority of it is going to be on the spec penetration and maybe some mix. As we alluded to in our prepared comments, most of it's predicated on the increase of our spec penetration that is resulting in that 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 price communities getting closings or increased closings in our western segment. Most of it's going to be as a result of the increase in our spec penetration and the resulting incentives associated with that.

Speaker 2

We have assumed relatively stable incentives, as though interest rates were going to remain generally where they are now.

Speaker 4

Great, thank you very much. Next question comes from Kenneth Zener from Seaport Research Partners. Ken, your line is now open.

Speaker 1

Good morning, everybody.

Speaker 2

Good morning.

Speaker 1

I wonder, the Florida buyers, I know you guys, obviously with your Investor Day, spent a lot of time down there.

Speaker 4

Asked the same question to both of you yesterday.

Speaker 1

What percent of those active adult buyers in Florida for those homes are generally from Florida? If you could scope that out a little bit. Your active adult buyers in Florida, are they mostly from out of state or how? It depends a little bit. It's a big state. It's interesting if you go all the way down to Naples, it's historically been as high as 80% over time. Conversely, if you go up north, it's something that's going to be closer to 40% to 50%, still a lot and noticeable. It does depend.

Speaker 2

It is also seasonal. Right. At the end of the season, the majority of our buyers are out of state. As you move through the summer months and kind of shoulder, you tend to have a more in-state buyer. Having listened to the call yesterday, Ken, I would agree with what you heard yesterday. Our Florida buyers come from all over, west coast, internationally, east coast. There is a lot, I mean there is a lot of desire to live in Florida and across the state. We continue to be quite bullish on Florida.

Speaker 3

Excellent. If you could, I.

Speaker 1

Apologize, I should know this, but when you say spec 71%, can you define spec? Is that intra quarter order closings, and how does that 71% compare to last quarter and a year ago's quarter? Thank you very much.

Operator

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

Speaker 2

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

Operator

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

Speaker 3

Great.

Speaker 1

How is that different than intra-quarter orders that were closing? Because that's traditionally how I think about spec. What is that metric, if you have that available? Thank you.

Operator

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.

Speaker 1

Thank you very much.

Speaker 2

Thanks, Ken.

Speaker 4

Thank you very much. Our next question comes from Jay McCanless from Wedbush Securities Inc. Jay, your line is now open.

Speaker 1

Great, thanks.

Operator

Good morning, everyone. I have three questions for me.

Speaker 1

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.

Speaker 2

Yeah, certainly can. As I said, I've 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. I think most importantly when I think about Orlando, their mix of communities is really shifting from what we've had the last year or two to a more balanced book of consumer groups away from just exclusively first time buyers, which will continue to improve sales margins and returns.

Speaker 2

Sarasota also saw a nice improvement in pace and I think did a nice job reducing their inventory. As I mentioned before, we saw a pretty strong 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. Before I leave Sarasota, I did mention that we had that new Esplanade opening with just a great interest list in Q3 that we had planned to open last quarter. Very excited about that. When I look at the interest, Jacks also had a nice sales growth from both community count and pace expansion. You can hear a trend here. We're also very excited to open our first Esplanade there in St. Mary's and that will be in the first quarter. That one also has a nice interest list.

Speaker 2

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, MJ, we saw resale inventory month of supplies reduced in almost all our markets.

Speaker 1

Great.

Speaker 4

Thank you, Sheryl.

Speaker 1

Shifting out west, we heard from a couple of your competitors yesterday that NorCal especially may be seeing some tech job loss or some tech job concerns maybe.

Operator

What are you hearing from the field?

Speaker 1

Out there and how are you thinking about it? I think your community mix is pretty even between NorCal and SoCal. Anything you can give us on both those areas would be appreciated.

Speaker 2

Yeah, you know, for us, I'd say a little different. I mean we've been talking with the street with you for a while about lightening our capital investment, particularly in SoCal and reducing our community exposure. The communities that we have in SoCal, I would tell you, are performing well above the company average on absorptions. The fact that community countdown, which was quite intentional as we reallocated funds to other markets, 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 cancels in the Bay, and maybe this goes back to one of the earlier questions I got, were actually below the company average even with all the tech noise we're seeing.

Speaker 2

I would tell you have moderated quite a bit since the back half of last year. For us, the base sales only being flat had to do with open communities. We have three 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. You would expect some cautiousness with their equity in the tech, in a tech market like that. Honestly it's been pretty good overall.

Speaker 1

That's great. Thank you. 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 Taylor Morrison consumer who's looking at a house, their financial situation is in pretty good shape. It's more the macro that's scaring them at this point. Is that the bottom line takeaway we need to have from that perfect summary?

Speaker 2

You know, you're dealing with this move up active adult buyer. Jay, you're moving, you're talking about a more sophisticated consumer. The fact that they want to make sure they're getting the right deal compared to the marketplace, the fact that they're going to be a little bit more cautious and understand how the macro affects them, I think makes a lot of sense. They have the financial wherewithal. It's not that that's holding them. The ones that are kind of sitting on the sidelines. Would you agree? Any other specifics in the research, Erik, that you point to?

Operator

No.

Speaker 1

It's really interesting and I think it circles back to the interest in specs and looking at for incentives too. I think it's all tied together and it's really sentiment. Again, rightly or wrongly in the prepared remarks, we frame that as a positive because it's much more difficult to fix your financial situation than it is. At least that's something that, you know, you don't. It's really about the newspaper and the sentiment that seems to be impacting people's desire to be out shopping, to make.

Speaker 2

To move, you know, and we'll see in some time, Jay, what happens. I would point to the big beautiful bill and some of the benefits, you know, with the SALT deduction cap temporarily lifted, the permanence of the $750,000 on mortgage interest that now won't expire. I think some of those things will help the consumer. All of that's kind of been up in the air for a while. Obviously, the mortgage insurance deductions, I think that will be more focused to the entry-level buyer. I think all of those things, as all of this kind of is put to bed, and gets understood by the consumer and then some confidence in what's going to happen with rates, I think all of this begins to play a part for them.

Speaker 1

Since you brought it up, I'm going to go ahead and ask it. I was going to ask this question probably next quarter's call.

Speaker 3

Have you all looked to see?

Speaker 1

This increase on the SALT cap, how much it might help people? I figured everyone's going to be talking about it, looking at it, but since.

Operator

You all brought it up early.

Speaker 1

Figured I'll go ahead and ask now.

Speaker 2

Yeah, I think at this point I don't think I can quantify it for you. For us, it's really California that's going to be impacted. Right. Mostly, it's absolutely going to have a benefit. I think the benefit goes to your last question though. It really does come around confidence. They're not going to make a purchase decision because of the SALT cap, but having that, I think, in the formula helps them. We're looking at it on an overall price point. If you look at the base price I just talked about with the overall ASP at $1 million, it's certainly going to create a benefit. I don't think it's what gets them over some of the confidence issues they're dealing with, but I think it's helpful. Absolutely.

Speaker 1

I think probably for Texas as well, some of the higher priced homes.

Operator

Sell down there because people forget that.

Speaker 1

Texas is a relatively high property tax market. I'll definitely ask you about.

Speaker 2

Absolutely.

Speaker 1

I think it's going to be good for Yardly's business, and thank you. Thanks for taking my question.

Speaker 2

Thank you. I appreciate it.

Speaker 4

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

Speaker 2

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

Speaker 4

As we conclude today's call, we'd like to thank everyone for joining us. Now disconnect your lines.

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