Q1 2024 Taylor Morrison Home Corporation Earnings Call

Hello, everyone and thank you for standing by today's call will be beginning in just four minutes time, we thank you for your patience.

[music].

Speaker Change: Good morning, and welcome to Taylor Morrison's first quarter 2024 earnings Conference call. Currently all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

Speaker Change: As a reminder, this conference call is being recorded.

Speaker Change: And I'd like to introduce Mackenzie Aron Vice President of Investor Relations. 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.

Mackenzie Jean Aron: You can review in our earnings release on the Investor Relations portion of our website at Taylor Morrison Dotcom. These.

Mackenzie Jean Aron: These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

Mackenzie Jean Aron: 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.

Mackenzie Jean Aron: In addition, we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our release now I will turn the call over to our chairman and Chief Executive Officer, Cheryl Palmer.

Sheryl Denise Palmer: Thank you Mackenzie and good morning, everyone. Joining me is curt's been hefty, our chief Financial Officer, and Eric Hughes, Our Chief Corporate operations Officer.

Sheryl Denise Palmer: Today, I will share the highlights from our first quarter as well as an overview of the competitive differentiators driving our strong performance. After my remarks, Eric will review, our land portfolio and returns focused investment strategy, well Curt will detail, our financial results and guidance metrics.

Erik Heuser: In the first quarter, our team delivered a strong start to the year, including better than expected sales activity upside to our gross margin expectations and efficient construction progress that has set the stage for continued success through the remainder of the year, we delivered 2000 and 731.

One home at a better than expected home closings gross margin of 24% driving earnings per diluted share of $1 75, and 14% growth in our book value per share to $50 with consistent activity throughout the quarter, our net sales orders increased.

Operator: Hello everyone, and thank you for standing by. Today's call will be beginning in just one minute. We thank you for your patience. Good morning, and welcome to Taylor Morrison's first quarter 2024 Earnings Conference call. Currently, all participants are in a 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 would now like to introduce Mackenzie Aron, Vice President of Investor Relations. Please go ahead.

Erik Heuser: 29% year over year, driven by monthly sales pace of three seven per community, putting us firmly on track to meet our annual sales pace goal in the low three range.

Erik Heuser: Following the positive first quarter momentum, we are raising our full year guidance and now expect to deliver approximately 12500 homes at a home closings gross margin between 23, and a half and 24% and an average price of 600 to 610000. This improved outlook is.

Mackenzie Jean Aron: Thank you and good morning, everyone. We appreciate you joining us today.

Erik Heuser: Enforced by our healthy backlog of over 6200 homes and includes the expected contribution from our entry into Indianapolis that I will share more on in just a moment.

Mackenzie Jean Aron: 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, which 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 these forward-looking statements.

Erik Heuser: Our strategic emphasis on broad consumer reach quality locations and a flexible production model is grounded in a through the cycle playbook that aims to deliver sustainable long term profitability and cash flow generation, while minimizing our exposure to housing cyclical forces.

The success of this strategy as demonstrated with our increase in this year's guidance for home closings gross margin and average closing price. Despite the renewed mantra of higher for longer interest rates since expanding our company's scale over the last many years and then focusing on fine tuning our operations.

Mackenzie Jean Aron: 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.

Sheryl Denise 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. Today I will share the highlights from our first quarter, as well as an overview of the competitive differentiators driving our strong performance. After my remarks, Erik will review our land portfolio and returns-focused investment strategy, while Curt will detail our financial results and guidance metrics. In the first quarter, our team delivered a strong start to the year, including better-than-expected sales activity, upside to our gross margin expectations, and efficient construction progress that has set the stage for continued success through the remainder of the year.

Erik Heuser: I am immensely proud of how our teams are executing on our long standing strategic priorities and even more excited for the meaningful growth and bottom line results. We anticipate as we look ahead. In addition to our strong company specific outlook. The housing market overall remains healthy despite the continued headwinds from.

Erik Heuser: Elevated mortgage rate some economic uncertainty in global unrest with a multi million unit deficit of housing in our country and supportive demographics across multiple generations.

Sheryl Denise Palmer: We delivered 2,731 homes at a better-than-expected home closings gross margin of 24 percent, driving earnings per diluted share of $1.75 and 14 percent growth in our book value per share to $50. With consistent activity throughout the quarter, our net sales orders increased 29% year over year, driven by a monthly sales pace of 3.7 per community, putting us firmly on track to meet our annual sales pace goal in the low three range.

Erik Heuser: Need for new construction that meets the demands of the evolving consumer is apparent as ever guided by our deep consumer research our land investment product offerings and sales strategies are focused on meeting these needs.

The diversification of our consumer mix from entry level through first and second move up to a resort lifestyle buyers is the foundation of our strong performance. We further maximize our results by optimizing our construction efficiencies and gross margin opportunity by offering both quick move in facts and personalized to rebuild home.

Erik Heuser: Aligned to our customers' needs and preferences, while our geographic diversification adds another layer of risk mitigation and growth opportunity.

By design. This approach allows us to tap into the deep pools of demand that exist to cross the homebuyer spectrum, each with important advantages to our overall portfolio that we believe enhance our performance over the full course of the housing cycle has various consumer groups respond differently to various.

Sheryl Denise Palmer: Following this positive first quarter momentum, we are raising our full-year guidance and now expect to deliver approximately 12,500 homes at a home closing gross margin between 23.5% and 24% at an average price of $600,000 to $610,000. This improved outlook is reinforced by our healthy backlog of over 6,200 homes and includes the expected contribution from our entry into Indianapolis that I will share more on in just a moment. Our strategic emphasis on broad consumer reach, quality locations, and a flexible production model is grounded in a through-the-cycle playbook that aims to deliver sustainable long-term profitability and cash flow generation while minimizing our exposure to housing cyclical forces.

Erik Heuser: Macroeconomic factors.

Erik Heuser: Today with affordability remaining stretch for many consumers at large and mid volatile interest rates. Our diversification has aided our ability to navigate these headwinds by allowing us to meet demand without sacrificing gross margins given relative pricing resiliency and our community supported by.

Erik Heuser: Our buyers financial strength.

Erik Heuser: In the first quarter, our average buyer financed by Taylor Morrison home funding, which had an exceptional capture rate of 87% had a credit score of 751 down payment of 23% and household income of 176000, each of which are stronger than industry norms.

Sheryl Denise Palmer: The success of this strategy is demonstrated by our increase in this year's guidance for home closings, gross margin, and average closing price, despite the renewed mantra of higher for longer interest rates. Since expanding our company's scale over the last many years and then focusing on fine-tuning our operations, I am immensely proud of how our teams are executing on our long-standing strategic priorities and even more excited for the meaningful growth and bottom-line results we anticipate as we look ahead.

In fact, our conventional buyers in the first quarter had nearly 400 basis points of average rate cushion and their ability to qualify and could absorb an additional half point increase in interest rates with negligible impact to their DTI ratio and monthly payment.

Erik Heuser: Capturing the strong start to the spring selling season, our first quarter net sales orders increased 56% sequentially and 29% year over year driven by improvement in our monthly pace to three seven per community.

Sheryl Denise Palmer: In addition to our strong company-specific outlook, the housing market overall remains healthy despite the continued headwinds from elevated mortgage rates, some economic uncertainty, and global unrest. With a multi-million unit deficit of housing in our country and supportive demographics across multiple generations, the need for new construction that meets the demands of the evolving consumer is as apparent as ever.

This pace marked our strongest since the first quarter of 2021 and was well ahead of our first quarter average of $2 six from 2013 to 2019, reflecting the multi year evolution of our portfolio to higher pace communities.

Sheryl Denise Palmer: Guided by our deep consumer research, our land investment, product offerings, and sales strategies are focused on meeting these needs. The diversification of our consumer mix from entry-level through first and second move-up to resort lifestyle buyers is the foundation of our strong performance. We further maximize our results by optimizing our construction efficiencies and gross margin opportunity by offering both quick-moving spec homes and personalized to-be-built homes aligned to our customers' needs and preferences, while our geographic diversification adds another layer of risk mitigation and growth opportunity.

Erik Heuser: I am also pleased that sales converted from online reservations increased 47% year over year as these tools continue to gain traction among our buyers further enhancing our success.

Erik Heuser: As the quarter progressed sales activity was consistently strong each month, allowing us to raise pricing in more than 60% of our communities and selectively reducing incentives.

Erik Heuser: When I look across the country. It's notable that our markets with the broadest consumer diversification performed most strongly during the quarter, while divisions with a heavier entry level concentration generally performed in line to slightly below our expectations.

Sheryl Denise Palmer: By design, this approach allows us to tap into the deep pools of demand that exist across the homebuyer spectrum, each with important advantages to our overall portfolio that we believe enhance our performance over the full course of a housing cycle as various consumer groups respond differently to various macroeconomic factors. Today, with affordability remaining stretched for many consumers at large amid volatile interest rates, our diversification has aided our ability to navigate these headwinds by allowing us to meet demand without sacrificing gross margins given relative pricing resiliency in our communities supported by our buyers' financial strengths.

Erik Heuser: Looking even more closely at our consumer data, we see that in the markets, where our medium customer income exceeds that of the overall MSA by a wide margin our sales paces and pricing strength have held that most resilient over the last several quarters again reinforcing that.

Erik Heuser: Benefit of our diversified consumer base.

Erik Heuser: Now if you've heard me discuss before our resort lifestyle and move up buyers, which accounted for a combined 63% of our first quarter sales tend to utilize all cash or minimal financing when making their purchase and have the means to spend upwards of $150000 on lot and design upgrades.

Sheryl Denise Palmer: In the first quarter, our average buyer financed by Taylor Morrison Home Funding, which had an exceptional capture rate of 87%, had a credit score of 751, a down payment of 23%, and a household income of $176,000, each of which is stronger than industry norms. In fact, conventional buyers in the first quarter had nearly 400 basis points of average rate cushion in their ability to qualify and could absorb an additional half-point increase in interest rates with negligible impacts on their DTI ratio and monthly payments.

Erik Heuser: To personalise there are to be built homes.

Erik Heuser: This contributes to our gross margin advantage of several hundred basis points compared to our company average.

Erik Heuser: The other end of the spectrum, our entry level communities benefit from a significant pull of pent up demand among first time buyers for simplified spec homes.

Erik Heuser: Be it with more limited financial flexibility that does require a higher use of incentives and other discounts.

Erik Heuser: As a result, while only a third of our first quarter closings utilized mortgage forward commitment to secure their desired interest rate nearly 50% of those were first time buyers.

Sheryl Denise Palmer: Capturing the strong start to the spring selling season, our first quarter net sales orders increased 56% sequentially and 29% year over year, driven by an improvement in our monthly pace to 3.7 per community. This pace marked our strongest since the first quarter of 2021 and was well ahead of our first quarter average of 2.6 from 2013 to 2019, reflecting the multi-year evolution of our portfolio to higher pace communities. I am also pleased that sales converted from online reservations increased 47% year-over-year as these tools continue to gain traction among our buyers, further enhancing our success.

Erik Heuser: Ultimately by serving the full spectrum of consumers, we capture the dual benefits of both healthy demand and pricing strength, which contributes to more durable long term earnings.

Erik Heuser: As I shared last quarter, we are targeting at least 10% home closings growth annually beginning in 2025 following the high single digit growth now expected this year based on our revised guidance.

Erik Heuser: Growth is critical to maintaining and further solidifying the many competitive and operational advantages associated with our strong local regional and national scale.

Erik Heuser: The vast majority of this growth is expected to be organic within our existing markets of operation, but as I've said in the past we're in the fortunate position of being able to evaluate other opportunities presented by single market local builders, many of whom are finding it difficult to grow given constricted capital availability tighter.

Sheryl Denise Palmer: As the quarter progressed, sales activity was consistently strong each month, allowing us to raise prices in more than 60% of our communities and selectively reduce incentives. When I look across the country, it's notable that our markets with the broadest consumer diversification performed most strongly during the quarter, while divisions with a heavier entry-level concentration generally performed in line to slightly below our expectations.

Erik Heuser: Labor resources and other constraint in the private market.

Speaker Change: One such opportunity recently arose that met our high thresholds for strategic fit and financial accretion and I am pleased to share. This morning, our entrance into Indianapolis by way of approximately 1500 homebuilding lots from Pi of builders nearly 55% of these lots are controlled via options.

Sheryl Denise Palmer: Looking even more closely at our consumer data, we see that in the markets where our median customer income exceeds that of the overall MSA by a wide margin, our sales paces and pricing strengths have held up most resiliently over the last several quarters, again reinforcing the benefits of our diversified consumer base. As you've heard me discuss before, our resort lifestyle and move-up buyers, which accounted for a combined 63% of our first quarter sales, tend to utilize all cash or minimal financing when making their purchase and have the means to spend upwards of $150,000 on lot and design upgrades to personalize their to-be-built homes.

Speaker Change: And we funded the purchase with cash on hand.

Speaker Change: We're excited to add this healthy and growing market tour Mal within our central region under the leadership of Pyatt strong existing team of tenured operators Indianapolis, both meaningful net migration that ranks top 10 in the country appealed by above average employment growth of 3% over the last 12.

And favorable affordability that is highest among the country's top 30 major metros.

Speaker Change: Due to its low land residuals, it's housing market has been remarkably resilient over time, and we are encouraged by the capital efficient growth opportunity the market presents.

Sheryl Denise Palmer: This contributes to a gross margin advantage of several hundred basis points compared to our company average. On the other end of the spectrum, our entry-level communities benefit from a significant pool of pent-up demand among first-time buyers for simplified spec homes, albeit with more limited financial flexibility that does require a higher use of incentives and other discounts. As a result, while only a third of our first quarter closings utilized a mortgage-forward commitment to secure their desired interest rate, nearly 50% of those were first-time buyers.

Speaker Change: Kirk will provide more specific details as to Indianapolis as financial contribution for the remainder of the year, but let me just say again that I am so excited about this compelling opportunity that further strengthens our portfolios consumer and geographic diversification.

Speaker Change: As I've laid out this morning. This unique diversification combined with our operational capabilities provide important competitive advantages that we believe will deliver superior growth and profitability in the years ahead I'd like to share a few of the long term targets. We have established that demonstrate that first on the topline is.

Sheryl Denise Palmer: Ultimately, by serving the full spectrum of consumers, we capture the dual benefits of both healthy demand and pricing strength, which contributes to more durable long-term earnings. As I shared last quarter, we are targeting at least 10% home closings growth annually beginning in 2025, following the high single-digit growth now expected this year, based on our revised guidance. This growth is critical to maintaining and further solidifying the many competitive and operational advantages associated with our strong local, regional, and national scale.

Speaker Change: I said earlier, we are targeting at least 10% home closings growth annually in 2025 and beyond with over 74000 homebuilding lot our existing land pipeline and planned community openings will support this growth over the next few years as we already own or control over 90% of the lots needed.

Speaker Change: Through 2026 for growth beyond 2026, we are focused on investing efficiently with a growing percentage of controlled lots and a preference for balance sheet friendly self developed projects in prime locations as Eric will discuss in more detail.

Sheryl Denise Palmer: The vast majority of this growth is expected to be organic within our existing markets of operation, but as I've said in the past, we're in the fortunate position of being able to evaluate other opportunities presented by single-market local builders, many of whom are finding it difficult to grow, given constructive capital availability, tighter labor resources, and other constraints in the private market. One such opportunity recently arose that met our high thresholds for strategic fit and financial accretion, and I am pleased to share this morning our entrance into Indianapolis by way of approximately 1,500 home building lots from PIA builders. Nearly 55% of these lots are controlled via auctions, and we funded the purchase with cash on hand.

Speaker Change: Secondly, we are targeting an annualized monthly sales pace in the low three range as compared to our historic run rate in the low to mid twos, which improves our asset turnover and returns on invested capital.

Speaker Change: This pace expectation is driven primarily by the newer often larger communities that we have underwritten over the last several years as well as our higher share of spec sales and expanded geographic footprint.

Speaker Change: Third we expect our homebuilding gross margins and returns to remain well above our historic average due to increased protection in operational efficiencies greater cost leverage from our scale and lower capitalized interest burden from our reduced debt levels.

Sheryl Denise Palmer: We're excited to add this healthy and growing market to our map within our central region under the leadership of PIAT's strong existing team of tenured operators. Indianapolis boasts meaningful net migration that ranks top 10 in the country, appealed by above average employment growth at 3% over the last 12 months and favorable affordability that is highest among the country's top 30 major metros. Due to its low land residual, its housing market has been remarkably resilient over time, and we are encouraged by the capital efficient growth opportunity the market presents.

Collecting these changes underwritten gross margins on homebuilding lots approved over the last four years exceeded those of lot underwritten in the prior four years by an average of more than 200 basis points.

Speaker Change: At the same time, we are committed to continually looking for ways to optimize our SG&A, including ongoing centralization and other cost reduction efforts such as our technology driven efficiencies.

Speaker Change: And lastly, the strength of our balance sheet is exceptional and we have significant financial flexibility, giving us confidence in strong cash flow generation and ongoing capacity to return excess capital to shareholders in the form of share repurchases with a 300 million repurchase goal. This year based on these long.

Sheryl Denise Palmer: Curt will provide more specific details as to Indianapolis' financial contribution for the remainder of the year, but let me just say again that I am so excited about this compelling opportunity that further strengthens our portfolio's consumer and geographic diversification. As I've laid out this morning, this unique diversification, combined with our operational capabilities, provides important competitive advantages that we believe will deliver superior growth and profitability in the years ahead. I'd like to share a few of the long-term targets we have established that demonstrate.

Speaker Change: Term targets, we expect to generate consistent mid to high teens returns on equity and ongoing book value growth for our shareholders with the ultimate goal of delivering top quartile results within our peer set with that let me now turn the call to Eric.

Erik Heuser: Thanks, Cheryl and good morning.

Sheryl Denise Palmer: First, on the top line, as I said earlier, we are targeting at least 10% home closing growth annually in 2025 and beyond. With over 74,000 home building lots, our existing land pipeline and planned community openings will support this growth over the next few years as we already own control over 90% of the lots needed through 2026. For growth beyond 2026, we are focused on investing efficiently with a growing percentage of controlled lots and a preference for balance sheet-friendly, self-developed projects in prime locations, as Erik will discuss in more detail.

Erik Heuser: Our owned and controlled lot inventory was 74182 homebuilding lots at quarter run rate.

Erik Heuser: On a trailing 12 month closings, which represented six five years of supply of which $3. One year's was one cause.

Erik Heuser: Lots represented 53% of our total support.

Erik Heuser: The specific vehicles and structures used to achieve this off balance sheet control include joint ventures, with like minded homebuilders seller notes and financing option takedowns and land banking arrangements with.

Erik Heuser: With each of these tools offering different risk return on cost tradeoffs, we aimed to match each deal with the ideal financing structure with a focus on generating optimal returns for each investment opportunity.

Sheryl Denise Palmer: Secondly, we are targeting an annualized monthly sales pace in the low three range as compared to our historic run rate in the low to mid twos, which improves asset turnover and returns on invested capital. This pace expectation is driven primarily by the newer, often larger communities that we have underwritten over the last several years, as well as our higher share of spec sales and expanded geographic footprint. Third, we expect our home building gross margins and returns to remain well above our historic average due to increased production and operational efficiencies, greater cost leverage from our scale, and lower capitalized interest burden from our reduced debt level. Reflecting these changes, underwritten gross margins on home building lots approved over the last four years exceeded those of lots underwritten in the prior four years by an average of more than 200 basis points.

Erik Heuser: As we look ahead, we expect to continue to gradually increase our control block percentage to 60% to 65% with the timing of achieving this multiyear target dependent on the cost and availability of such tools.

Erik Heuser: During the quarter, we invested $367 million in homebuilding land acquisition and $221 million in development of existing assets for a total of $588 million up from a total of $321 million a year ago.

Erik Heuser: For the full year, we continue to expect our land investment.

Erik Heuser: Between two three and $2 $5 billion with approximately 40% allocated to development.

Erik Heuser: The total investment amount will ultimately be dependent in part on our deployment of Atlanta for all tools throughout the year.

Erik Heuser: Cheryl noted, we already own or control over 90% of the lots needed to fulfill our growth plans through 2026, providing flexibility when evaluating lot acquisitions, but are primarily targeted for deliveries in 2027 and beyond.

Sheryl Denise Palmer: At the same time, we are committed to continually looking for ways to optimize our SG&A, including ongoing centralization and other cost reduction efforts, such as our technology-driven efficiency. And lastly, the strength of our balance sheet is exceptional, and we have significant financial flexibility, giving us confidence in strong cash flow generation and an ongoing capacity to return excess capital to shareholders in the form of share repurchases, with a $300 million repurchase goal this year.

Erik Heuser: On the development front, we are focused on bringing our existing lot positions to market with well over 200, new community openings planned through the end of 2025.

Erik Heuser: As a reminder, we have gradually increased our average underwritten community size to approximately 150 lots from 100 lots historically, which has been a modest headwind to our absolute community count level, but a significant driver of our stronger expected sales pesos and cost leverage.

Sheryl Denise Palmer: Based on these long-term targets, we expect to generate consistent mid- to high-teens returns on equity and ongoing book value growth for our shareholders, with the ultimate goal of delivering top quartile results within our peer set. With that, I now turn the call to Eric.

Erik Heuser: Based on these openings and our sales expectations. We now expect our second quarter and year end community count to be in the range of 330 to 340 inclusive of approximately 10, new communities and Indianapolis.

Erik Heuser: Compared to our prior guidance. We also benefited from a handful of communities that opened earlier than anticipated in the first quarter.

Erik Heuser: Thanks, Sheryl, and good morning. Our owned and controlled lot inventory was 74,182 home building lots at quarter end. Based on trailing 12-month closings, this represented 6.5 years of supply, of which 3.1 years was owned. Controlled lots represented 53% of our total supply. The specific vehicles and structures used to achieve this off-balance sheet control include joint ventures with like-minded homebuilders, seller notes and financing, option takedowns, and land banking arrangements. With each of these tools offering different risk-return and cost tradeoffs, we aim to match each deal with the ideal financing structure with a focus on generating optimal returns for each investment opportunity.

Erik Heuser: Before passing the call to Kurt I'd like to spend a moment elaborating more on Orlando approach, which has gradually evolved over the last many years to take greater advantage of our strong internal land development expertise to help drive our growth and enhance our returns as.

Erik Heuser: As we shared last quarter given the scarcity of finished lot deals we have reduced our reliance on expensive finished lot acquisitions delivered by Masterplan developers in favor of balance sheet friendly self developed land parcels.

Erik Heuser: Developing more of our own land, we gained many important advantages, including increased operational control and enhanced gross margin profile increased cost leverage from larger more efficient community layouts higher expected sales paces and expanded investment opportunities that often involves less competition from other builders.

Erik Heuser: As we look ahead, we expect to gradually increase our control lock to 60 to 65% with the timing of achieving this multi-year target dependent on the cost and availability of such tools. During the quarter, we invested $367 million in home building land acquisition and $221 million in development of existing assets for a total of $588 million, from a total of $321 million a year ago. For the full year, we continue to expect our land investment to be between $2.3 and $2.5 billion, with approximately 40% allocated to development. The total investment amount will ultimately be dependent, in part, on our deployment of land deferral tools throughout the year.

Erik Heuser: Less inclined to self develop.

Erik Heuser: Importantly, we undertake these self development investments with a sharp focus on returns and capital efficiency in fact over the last two years, 58% of the raw and partially finished lots. We have approved have had some form of capital relief.

Often in the form of seller financing or a takedown structure.

Erik Heuser: This allows us to still benefit from the capital efficiency of Justin sidewalk deliveries, while retaining the operational advantages and financial upside associated with self development.

Erik Heuser: Ultimately our land investment decisions are made on a project by project basis grounded in a returns driven underwriting framework that seeks to generate attractive full cycle performance with that I will turn the call to Kurt.

Kurt: Thanks, Eric and good morning, everyone.

Kurt: As you've heard this morning, we are pleased with our first quarter results and the momentum we have built for the remainder of the year for.

Erik Heuser: As Sheryl noted, we already own or control over 90% of the lots needed to fulfill our growth plans through 2026, providing flexibility when evaluating lot acquisitions that are primarily targeted for deliveries in 2027 and beyond. On the development front, we are focused on bringing our existing lot positions to market, with well over 200 new community openings planned through the end of 2025. As a reminder, we have gradually increased our average underwritten community size to approximately 150 lots from 100 lots historically, which has been a modest headwind to our absolute community count level, but a significant driver of our stronger expected sales paces and cost levels. Based on these openings and our sales expectations, we now expect our second quarter and year-end community count to be in the range of 330 to 340, inclusive of approximately 10 new communities in Indianapolis.

For the quarter, our net income was $190 million or $1 75 per diluted share.

Kurt: We delivered 2731 home closings at an average price of $599000, which produced total homebuilding revenue of $1 $6 billion consistent with our prior guidance.

Kurt: Our average cycle times improved by about one week sequentially driven by our team's focus on operational efficiency and normalization of supply chain dynamics.

Kurt: By year end, we are targeting another three to four weeks of improvement, which would bring our average cycle time back to pre pandemic norms of approximately five to seven months, depending on the product profile.

Erik Heuser: Compared to our prior guidance, we also benefited from a handful of communities that opened earlier than anticipated in the first quarter. Before passing the call to Curt, I'd like to spend a moment elaborating more on our land approach, which has gradually evolved over the last many years to take greater advantage of our strong internal land development expertise to help drive our growth and enhance our returns. As we shared last quarter, given the scarcity of finished lot deals, we have reduced our reliance on expensive finished lot acquisitions delivered by master plan developers in favor of balance sheet-friendly self-developed land parcels.

Kurt: In addition to driving these cycle times savings our teams have ramped up our start volume over the past several quarters to manage appropriate inventory levels and meet our closing goals and.

Kurt: In the first quarter, we started 3442 homes or three five per community per month up 35% from 2549 homes or two six per community per month, a year ago.

Including these starts we had 8578 homes under production at quarter end.

Erik Heuser: By developing more of our own land, we gain many important advantages, including increased operational control and enhanced gross margin profile, increased cost leverage from larger, more efficient community layouts, higher expected sales paces, and expanded investment opportunities that often involve less competition from other builders less inclined to self-develop. Importantly, we undertake these self-development investments with a sharp focus on returns and capital efficiency. In fact, over the last two years, 58% of the raw and partially finished lots we have approved have had some form of capital relief, most often in the form of seller financing or a takedown structure.

Kurt: These homes, 38% or 3299 were spec homes of which only 415 were finished with a skew towards our entry level communities were first time buyers prefer quick move in homes.

Kurt: Based on these homes under production, we expect to deliver approximately 3000 homes in second quarter.

Kurt: And for the full year, we now expect to deliver approximately 12500 homes up from at least 12000 homes previously.

Kurt: This includes around 175 homes in Indianapolis for the remainder of the year.

Erik Heuser: This allows us to still benefit from the capital efficiency of just-in-time lot deliveries while retaining the operational advantages and financial upside associated with self-development. Ultimately, our land investment decisions are made on a project-by-project basis, grounded in a returns-driven underwriting framework that seeks to generate attractive full-cycle performance. With that, I will turn the call to Curt.

Kurt: We expect the average price of our home closings to be approximately $605000 for the second quarter and now anticipate a range of 600000 to $610000 for the year.

Kurt: Our home closing gross margin was 24% up slightly from 23, 9% a year ago.

Kurt: This exceeded our guidance due to a combination of favorable mix lower incentives with our diverse consumer offerings and greater cost savings.

Curt VanHyfte: Thanks, Erik, and good morning, everyone. As you heard this morning, we are pleased with our first quarter results and the momentum we have built for the remainder of the year. For the quarter, our net income was $190 million, or $1.75 per diluted share. We delivered 2,731 home closings at an average price of $599,000, which produced total home building revenue of $1.6 billion, consistent with our prior guidance. Our average cycle times improved by about one week sequentially, driven by our team's focus on operational efficiency in the normalization of supply chain dynamics. By year end, we are targeting another three to four weeks of improvement, which would bring our average cycle time back to pre-pandemic norms of approximately five to seven months, depending on the product profile.

Kurt: Based on the strength of our backlog, we now expect our home closings gross margin to be at least 23, 5% for the second quarter and between 23.5% to 24% for the full year inclusive of our new Indianapolis assets.

Kurt: This improved margin outlook reflects the pricing power, we achieved thus far in the year and our conviction that incentives will remain manageable even with the recent move in interest rates given the strength of our buyer profile.

Kurt: As Cheryl discussed we expect our gross margin to remain above our pre pandemic averages given the benefit of meaningful operational enhancements and greater overall scale that has structurally improved our profitability.

Kurt: Our net sales orders increased 29% year over year to 3686 homes.

Curt VanHyfte: In addition to driving these cycle time savings, our teams have ramped up our start volume over the past several quarters to manage appropriate inventory levels and meet our closing goals. In the first quarter, we started 3,442 homes, or 3.5 per community per month, up 35% from 2,549 homes, or 2.6 per community per month a year ago. Including these starts, we had 8,578 homes under production at quarter end. Of these homes, 38%, or 3,299, were spec homes, of which only 415 were finished, but they skewed towards our entry-level communities where first-time buyers prefer quick move-in homes.

Kurt: This was driven by 28% increase in our monthly absorption pace to three seven per community, which was our highest pace since the first quarter of 2021.

Kurt: And a 2% increase in ending community count to 331 outlets.

Kurt: Net sales order price was $608000 down 3% year over year.

Cancellation rates remained low at just 7% of gross orders this was down from 14% a year ago.

Kurt: Our below average cancellation rates continue to reflect the strength of our diversified buyers diligent pre qualifications.

Kurt: High conversion among well researched buyers utilizing our online reservation tools and a proactive approach to securing meaningful upfront deposits from our customers, which averaged $57000 per home at quarter end.

Curt VanHyfte: Based on these homes under construction, we expect to deliver approximately 3,000 homes in the second quarter. And for the full year, we now expect to deliver approximately 12,500 homes, up from at least 12,000 homes previously. This includes around 175 homes in Indianapolis for the remainder of the year. We expect the average price of our home closings to be approximately $605,000 for the second quarter and now anticipate a range of $600,000 to $610,000 for the year.

Kurt: SG&A as a percentage of home closings revenue was 10, 4% up from nine 9% a year ago, due primarily to higher external broker commissions.

Kurt: Going forward, we will maintain a disciplined cost structure and are still forecasting an SG&A ratio in the high 9% range. This year.

Kurt: Our financial services team achieved a capture rate of 87% up from 82% a year ago.

Curt VanHyfte: Our home closings gross margin was 24%, up slightly from 23.9% a year ago. This exceeded our guidance due to a combination of favorable mix, lower incentives with our diverse consumer offerings, and greater cost savings. Based on the strength of our backlog, we now expect our home closings gross margin to be at least 23.5% for the second quarter and between 23.5% to 24% for the full year, inclusive of our new Indianapolis asset.

Kurt: This strong result drove financial services revenue of $47 million with a gross margin of 46, 5% up from $35 million and 37% a year ago, respectively.

Kurt: By using finance as a sales tool we benefit from the strong execution of our financial services business, which provides customized solutions for our homebuyers and improves our operational control and visibility.

Kurt: Turning now to our strong capital position, we ended the quarter with liquidity of approximately $1 $6 billion.

Curt VanHyfte: This improved margin outlook reflects the pricing power we achieved thus far in the year and our conviction that incentives will remain manageable even with the recent move in interest rates given the strength of our buyer profile. As Sheryl discussed, we expect our gross margin to remain above our pre-pandemic averages, given the benefit of meaningful operational enhancements and greater overall scale that have structurally improved our profitability. Our net sales orders increased 29% year over year to 3,686 homes.

Kurt: This included $554 million of unrestricted cash and $1 1 billion of available capacity on our revolving credit facilities, which remained undrawn outside of normal course letters of credit.

Kurt: Our net homebuilding debt to capitalization ratio was 21% down from 21% a year ago and remaining within our long term targeted ranges.

Kurt: Our next senior note maturity is not until 2027, providing us with financial flexibility.

Curt VanHyfte: This was driven by a 28% increase in our monthly absorption pace to 3.7 per community, which was our highest pace since the first quarter of 2021, and a 2% increase in ending community count to 331 outlets. Our net sales order price was $608,000, down 3% year over year. However, cancellation rates remain low at just 7% of gross orders.

Kurt: Reflecting the strong capital position, we are pleased that Moody's recently upgraded our credit rating to <unk>, one from <unk> with a stable outlook.

Kurt: During the quarter, we repurchased one 5 million shares of our common stock outstanding for $92 million.

Kurt: At quarter end, our remaining share repurchase authorization was $403 million and we still expect to repurchase a total of approximately $300 million of our common stock this year.

Curt VanHyfte: This was down from 14% a year ago. Our below-average cancellation rates continue to reflect the strength of our diversified buyers, diligent pre-qualifications, high conversion among well-researched buyers utilizing our online reservation tools, and a proactive approach to securing meaningful upfront deposits from our customers, which average $57,000 per home at Quarter End. SG&A, as a percentage of home closings revenue, was 10.4%, up from 9.9% a year ago, due primarily to higher external broker commissions.

Kurt: Based on our share repurchases completed and settled in the first quarter. We now expect our diluted shares outstanding to average $108 million in the second quarter and for the full year.

Kurt: As is our normal practice this guidance does not reflect the potential benefit of any future share repurchases that may occur over the remainder of the year now I will turn the call back over to Sheryl.

Sheryl: Thank you Kurt as we wrap up let me once again reiterate that as you have heard us discuss today, our priority is driving growth and returns for our shareholders to do so our strategy is grounded in diversification across consumer groups and geographies with a focus on financially secure buyers in core locations. We continue to expect.

Curt VanHyfte: Going forward, we will maintain a disciplined cost structure and are still forecasting an SG&A ratio in the high 9% range this year. Our financial services team achieved a capture rate of 87%, up from 82% a year ago. This strong result drove financial services revenue of $47 million, with a gross margin of 46.5%, up from $35 million and 37% a year ago, respectively. By using finance as a sales tool, we benefit from the strong execution of our financial services business, which provides customized solutions for our homebuyers and improves our operational control and visibility.

Sheryl: First time buyers, who represent a meaningful portion of our sales and closings, but appreciate how the array of our consumer groups health mask the pressures today's homebuyer is facing.

Sheryl: We believe that our diversification is truly a differentiator in our ability to compete in the marketplace. It improves our resiliency against interest rate and affordability pressures makes us better more efficient purchasers of land and ultimately our opportunity to sustain attractive long term returns for our shareholders. We have achieved this diversification over years.

Sheryl: I've intentionally broadening our consumer segmentation geographic footprint and strengthening of our operational capabilities given the associated financial benefits that we've discussed. This morning, we expect our business to deliver meaningfully stronger results in our legacy operations allowed as reflected in our long term.

Curt VanHyfte: Turning now to our strong capital position, we ended the quarter with liquidity of approximately $1.6 billion. This included $554 million of unrestricted cash and $1.1 billion of available capacity on our revolving credit facilities, which remain undrawn outside of normal course letters of credit. Our net home building debt-to-capitalization ratio was 20.1%, down from 21% a year ago and remaining within our long-term targeted ranges. Our next senior note maturity is not until 2027, providing us with financial flexibility. Reflecting this strong capital position, we are pleased that Moody's recently upgraded our credit rating to BA1 from BA2 with a stable outlook.

Sheryl: Targets for sales pace gross margins and returns in addition to exceeding our historic performance. We are also striving to drive top tier results within our industry. We're excited about the opportunities ahead of us and look forward to continuing to up to.

Speaker Change: Kate you on our progress and most importantly, let me share my deepest appreciation to all our talented team members across the country to each of you. Thank you. So much for your dedication to our organization and customers I am truly proud to share the results of all of your efforts with that let's open the call to your questions operator.

Curt VanHyfte: During the quarter, we repurchased 1.5 million shares of our common stock outstanding for $92 million. At quarter end, our remaining share repurchase authorization was $403 million, and we still expect to repurchase a total of approximately $300 million of our common stock this year. Based on our share repurchases completed and settled in the first quarter, we now expect our diluted shares outstanding to average $108 million in the second quarter and for the full year. However, as is our normal practice, this guidance does not reflect the potential benefit of any future share repurchases that may occur over the remainder of the year. Now, I will turn the call back over to Sheryl.

Speaker Change: Please provide our participants with instructions.

Speaker Change: Thank you if you would like to ask a question today. Please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind I would like to be removed from the queue. Please press star I'm in case, we ask that you. Please limit yourself to one question and one follow up.

Speaker Change: Our first question today comes from the line of Mike Dahl with RBC capital markets. Please go ahead. Your line is now open.

Michael Glaser Dahl: Good morning, Thanks for taking my questions.

Michael Glaser Dahl: Certainly appreciate the morning.

Michael Glaser Dahl: The diversification good.

Michael Glaser Dahl: Good morning, and the benefits. So that's provided you I wanted to drill down first on on <unk>.

Sheryl Denise Palmer: Thank you, Curt. As we wrap up, let me once again reiterate that, as you have heard us discuss today, our priority is driving growth and returns for our shareholders. To do so, our strategy is grounded in diversification across consumer groups and geographies with a focus on financially secure buyers in core locations. We continue to expect first-time buyers to represent a meaningful portion of our sales and closings but appreciate how the array of our consumer groups helps mask the pressures today's home buyer is facing.

Michael Glaser Dahl: So the comments about the first time buyer.

Michael Glaser Dahl: Exhibiting maybe a little more sensitivity quarter win.

Michael Glaser Dahl: Progressed and rates went up can you can you drill down a little bit more.

Michael Glaser Dahl: The pace that you were seeing.

Michael Glaser Dahl: Kind of inter quarter with your with your first time buyers and then maybe zoom out and give us a flavor for what April has looked like.

Michael Glaser Dahl: For your company.

Michael Glaser Dahl: Yeah.

Speaker Change: Yeah, absolutely. Thanks for the question myself.

Sheryl Denise Palmer: We believe that our diversification is truly a differentiator in our ability to compete in the marketplace. It improves our resiliency against interest rate and affordability pressures, makes us better, more efficient purchasers of land, and ultimately our opportunity to sustain attractive long-term returns for our shareholders.

Speaker Change: As far as pace, we saw a good strong pace actually up significantly year over year with our first time buyers are highest pace was with our move up buyers, but I'm pretty close honestly when I look at the when I compare the two.

Speaker Change: You know when I talk about the affordability of the first time buyer I don't think given what's happened to pricing interest rates just general inflation that there should be a surprise I think it's very consistent with what we're hearing from others. There's a number of different stat I could share that really show the meaningful dip.

Sheryl Denise Palmer: We have achieved this diversification over years of intentionally broadening our consumer segmentation, geographic footprint, and strengthening of our operational capabilities. Given the associated financial benefits that we've discussed this morning, we expect our business to deliver meaningfully stronger results than our legacy operations allowed, as reflected in our long-term targets for sales pace, gross margin, and returns. In addition to exceeding our historic performance, we are also striving to drive top-tier results within our industry.

Speaker Change: <unk> do you know when I look at Q1, we generally saw rates down.

Speaker Change: As you know and then they started moving up a little bit as we moved into the end of the quarter and into April when I look at our backlog is kind of a proxy for the impact to our first time buyer and I look at what if rates were compared to our closing interest rate average closing interest rates you have to look at our backlog you know.

Sheryl Denise Palmer: We're excited about the opportunities ahead of us and look forward to continuing to update you on our progress. And, most importantly, let me share my deepest appreciation for all our talented team members across the country. To each of you, thank you so much for your dedication to our organization and customers. I am truly proud to share the results of all of your efforts. With that, let's open the call to your questions. Operator, please provide our participants with instructions.

Speaker Change: As of the end of the quarter and rates moved to seven 5% the impact to our conventional buyer is modest I mean, they move from a DTI of 39, just over 39 to just over 40 and their payment moved modestly until let's say $275, but there are <unk>.

Operator: Thank you. If you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. We ask that you please limit yourself to one question and one follow-up. Our first question today comes from the line of Mike Barr with RBC Capital Markets. Please go ahead; your line is now open.

Speaker Change: Income of 17600, if I compare that to an FHA buyer.

Speaker Change: Or their average income is 11200.

Speaker Change: And we and rates move to seven 5% and third payment would go up $468.

Speaker Change: And that kind of lower loan amount and their DTI is would be somewhat stressed going from 46 to 51. So obviously with this large pool of affordable buyers and first time buyers that gives us the opportunity to work with lots of different customers to get them to that place, but it just takes a lot.

Alex Barron: Morning, thanks for taking my questions. I certainly appreciate the diverse morning and the benefits that that's provided you. I want to drill down first on your comments about the first-time buyer exhibiting maybe a little more sensitivity as the quarter went, progressed, and rates went up. Can you drill down a little bit more on the kind of the pace that you were seeing kind of inter-quarter with your first-time buyers, and then maybe zoom out and give us a flavor for what April looked like in Accra for your company?

Speaker Change: It'll more dollars because they just don't have another lever to pull they don't have more dollars. They can bring in.

Speaker Change: For a down payment.

Speaker Change: There are highly dependent on gift funds compared to our overall buyer group. So just a couple of examples.

Speaker Change: Yes, that's really helpful and I guess just to dovetail on that for my second question.

Speaker Change: With respect to incentives I think Curt made the comment that your guidance.

Sheryl Denise Palmer: Yeah, absolutely. Thanks for the question, Michael.

Speaker Change: Could you just kind of your conviction that incentives will be manageable, just kind of stop short of saying stable but.

Speaker Change: Yeah.

Speaker Change: Yes.

Speaker Change: Theoretically cushion.

Speaker Change: For some of your buyers, but in practice, we have seen in the market kind of fluctuate up and down with incentives pretty directionally correlated with with rates. So again, maybe just.

Sheryl Denise Palmer: As far as pace goes, we saw a good, strong pace, actually up significantly year over year with our first time buyers. Our highest pace was with our move up buyers. But pretty close, honestly, when I look at when I compare the two.

Speaker Change: A little more specificity on where your incentives were.

Speaker Change: Closings and orders in the quarter and maybe what specifically you're assuming in terms of the cadence for the balance of the year on incentives.

Sheryl Denise Palmer: You know, when I talk about the affordability of the first time buyer, I don't think given what's happened to pricing, interest rates, just general inflation, that this should be a surprise. I think it's very consistent with what we're hearing from others. There are a number of different stats I could share that really show the meaningful difference. You know, when I look at Q1, we generally saw rates down, as you know, and then they started moving up a little bit as we moved into the end of the quarter and into April.

Speaker Change: Yeah year over year I would tell you our incentives are down actually fairly meaningfully.

Speaker Change: Over quarter, they were just modestly up.

Speaker Change: They do you're exactly right, Michael they do travel with interest rates.

Speaker Change: We're not chasing the lowest trade when we look at the average rate I mean, we've been marketing generally about 5494 conventional buyers or FHA buyers. We might've had some for 99, we might've had some five in a quarter.

Speaker Change: That cost moved quarter to quarter, but you know it was about a third of our buyers as I said, but most of those were.

Sheryl Denise Palmer: I mean, they move from a DTI of 39, just over 39, to just over 40. And their payment moves modestly to, let's say, $275. But their average income is $17,600. If I compare that to an FHA buyer, or their average income is $11,200, and rates have moved to 7.5%. Their payment would go up $468, and that's on a lower loan amount. And their DTIs would be somewhat stressed, going from 46 to 51.

Speaker Change: Half of those were our first time buyers.

Speaker Change: So when I look forward, obviously, so dependent on what happens to rates.

Speaker Change: But when I look at the overall portfolio I actually don't expect a significant move if rates drop I would expect that number to drop fairly meaningfully.

Speaker Change: But I actually think given where rates are today.

Speaker Change: With what we saw in first quarter, we should be in a generally good position.

Speaker Change: Great. Thank you.

Sheryl Denise Palmer: So obviously, with this large pool of affordable buyers and first-time buyers, that gives us the opportunity to work with lots of different customers to get them to that place, but it just takes a little more money because they just don't have another lever to pull. They don't have more money they can bring in for a down payment. They're highly dependent on gift funds compared to our overall buyer group. So, just a couple of examples.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Our next question comes from Matthew Bouley with Barclays. Please go ahead.

Matthew Adrien Bouley: Good morning, everyone. Thank you for taking the questions and for all the detail.

Matthew Adrien Bouley: Maybe just I wanted to pick up on one of the higher level of points you made sheryl around gross margins I think I heard you say that that over the past four years your underwritten gross margins.

Matthew Adrien Bouley: Had exceeded the prior four years by 200 basis points.

Sheryl Denise Palmer: Yeah, that's really helpful. And I guess I just want to dovetail on that for my second question. With respect to incentives, I think Curt made the comment that your guidance. It assumes a kind of your conviction that incentives will be manageable, which kind of stops short of saying stable. But, you know, again, another theoretical cushion that might be useful for some of your buyers, but in practice, we have seen the market kind of fluctuate up and down with incentives, but pretty directionally correlated with rates.

Speaker Change: I think that's a big step up I am curious if you could elaborate a little on what's really allowed you to improve your underwriting to that degree as it is at scale.

Matthew Adrien Bouley: There is there like a market driven aspect to that where the land Counterparties are also seeing a better return. It just it seems kind of meaningful as we think about your go forward gross margin. So cure curious if you can.

Speaker Change: Expand on that a little bit thank you.

Speaker Change: Hi, Matt It's Eric I'll take a quick shot at that and I'm not sure I'll follow a fill in any blanks, but yes, it's something that's noticeable.

Sheryl Denise Palmer: So, again, maybe just a little more specificity on where your incentives were on closing and orders in the quarter and maybe what specifically you're assuming in terms of the cadence for the balance of the year on incentives. Yeah, year over year, I would tell you our incentives are down.

Speaker Change: We track it pretty closely over time I would say, it's a function of a number of things one of them. One of them is related to the type of land. We're buying we've mentioned that we're self developing.

Speaker Change: A lot more land, albeit off balance sheet in every circumstance, we can and so that's self development, we expect a higher gross margin for.

Sheryl Denise Palmer: Yeah, year over year, I would tell you our incentives are down, actually fairly meaningfully. Quarter over quarter, they were just modestly up.

Sheryl Denise Palmer: They do, you're exactly right, Michael, they do travel with interest rates. We're not chasing the lowest rate. When we look at the average rate, I mean, we've been marketing generally about 549 for conventional buyers. For FHA buyers, we might have had some 499; we might have had some five and a quarter. That cost moved quarter to quarter. But, you know, it was about a third of our buyers, as I said, but most of those were, at least half of those were, our first time buyers.

Speaker Change: And so we've seen that flow through the system gradually over time.

Speaker Change: I would also say that our general scale and kind of the operational benefits that we spoken about are also flowing through the system and so.

Speaker Change: Lastly, just a general efficiency in the land market as we know.

Speaker Change: Theres been more builders kind of gaining market share and so I think that's created some degree of efficiency generally in the market. So those would be the three things I would point to.

Speaker Change: And then Curt I would assume just our overall balance sheet paying down the debt that's also going to pay.

Speaker Change: As we've highlighted I guess was too Matt we paid down $350 million of debt last year, we paid off.

Sheryl Denise Palmer: So, when I look forward, obviously, it's so dependent on what happens to rates. But when I look at the overall portfolio, I actually don't expect a significant move. If rates drop, I would expect that number to drop fairly meaningfully. But I actually think, given where rates are today, with what we saw in the first quarter, we should be in a generally good position.

Speaker Change: <unk> amount in 'twenty, two as well so just our overall infrastructure from a debt and interest kind of capacity is down over that period of time as well.

Speaker Change: Yeah.

Matt: Got it yes, absolutely the cap interest for sure that makes sense.

Speaker Change: Okay, and then maybe just stick on that long term gross margin outlook.

Speaker Change: You said in the release sort of thinking about low to mid 20.

Speaker Change: The second part of the margin question would be what our lot cost doing in the gross margin today.

Operator: Our next question comes from Matthew Bouley with Barclays. Please go ahead, Matthew.

Speaker Change: And is there a period, where kind of as you deplete that sort of pre COVID-19 lower cost land should we expect that there is.

Matthew Adrien Bouley: Good morning, everyone. Thank you for taking the questions and for all the details. Maybe I just want to pick up on one of the higher level points you made, Cheryl, around gross margins. I think I heard you say that over the past four years, your underwritten gross margins have exceeded the prior four years by 200 basis points. I mean, I think that's a big step up. I'm curious if you could elaborate a little on what's really allowed you to improve your underwriting to that degree.

Speaker Change: Kind of a correction in the margin like a onetime correction as you as you see kind of newer cost land flow through how would that sort of play through into that longer term margin guidance. Thank you.

Speaker Change: Yes.

Speaker Change: Yes, Matt This is Eric I'll take a stab at that again and then Curt can fill in some blanks.

Erik Heuser: Yes to your point, we do still have some pre COVID-19 land, it's still about a third of our of our land and so we will continue to see that flow through and it's been very consistent we've seen that percentage kind of decrease 345% per quarter over time and so.

Matthew Adrien Bouley: Is it scale? I mean, is there like a market-driven aspect to that where the land counterparties are also seeing a better return? It seems kind of meaningful as we think about your go forward gross margins, so I'm curious if you can expand on that a little bit. Thank you.

Erik Heuser: We won't see a material fall off a cliff in that regard.

Erik Heuser: So we do still have some in our average vintage of our land portfolio. Today is about three eight years and it really hasn't changed that much over the last number of years. So that's not terribly different from history, either so thats kind of the rearview mirror in terms of today in the current.

Erik Heuser: Hi Matt, it's Erik.

Erik Heuser: Taking a look at surveys and Peter's I would say that.

Erik Heuser: Land is increasing both Roger as well as the development side of the equation kind of eight 910% and that really is somewhat normal and obviously you need about 253% of ASP lift to cover that over time, and so that seems somewhat balanced and quote unquote normal as we've seen over time and then lastly.

Erik Heuser: And Kirk can elaborate on this we are seeing in terms of our.

Erik Heuser: <unk> flow through the P&L, we are seeing a little bit of increase but it's not terribly meaningful it is kind of floating and that three 4%.

Erik Heuser: And as we think about the.

Erik Heuser: Lotte average lot costs coming through the P&L.

Erik Heuser: And then very lastly, I would say we track very closely our expected gross margin and land residual ratio in our underwriting and I can tell you that our most recent land residual ratio is the same as it has been over the last nine years.

Erik Heuser: On average and so that coupled with kind of our gross margin consistency in the underwriting gives us confidence that we're going to see kind of that that somewhat normalized land depreciation and being able to cover it.

Erik Heuser: And Matt just to kind of double down on that.

Matt: As Eric alluded to year over year of 23 to 24, we've got assumed in our guide about a mid single digit kind of appreciation factor or inflation in our lot costs. So right around that mid single digit kind of threshold.

Speaker Change: Great. Thanks, everyone. Good luck.

Speaker Change: Thank you.

Erik Heuser: The next question comes from Carl Reichardt with BTG. Please go ahead.

Carl Edwin Reichardt: Thanks, Good morning, everybody nice to talk to you.

Carl Edwin Reichardt: Just following up on those last couple of questions.

Carl Edwin Reichardt: Hey, there.

Erik Heuser: I'll take a quick shot at that and let Sheryl fill in any blanks. But yeah, it's something that's noticeable, and we track it pretty closely over time. I would say it's a function of a number of things, and one of them is related to the type of land we're buying. We mentioned that we're self-developing a lot more land, albeit off balance sheet in every circumstance we can. And so for that self-development, we expect a higher gross margin.

Carl Edwin Reichardt: The increase in margin at least in part as a function too of growing your lots per community by 50% over what they used to be right. So you've got some better fixed cost spread in the stores I'm, assuming but I'm curious about the price and availability of off balance sheet capital today, when you talk about self developing helping your margin but.

Erik Heuser: And so we've seen that flow through the system gradually over time. I would also say that our general scale and the operational benefits that we've spoken about are also flowing through the system. And lastly, just the general efficiency in the land market. As we know, there have been more builders gaining market share, and so I think that's created some degree of efficiency in the market. So those would be the three things I would point out.

Curt VanHyfte: And then, Curt, I would assume just our overall balance sheet, paying down the debt, that's also going to pay off. Yeah, I mean, as we find... Last year, Matt, we paid down $350 million of debt. Last year, we paid off a significant amount in 2022 as well. So just our overall infrastructure from a debt and interest kind of capacity is down over that period of time as well.

Matthew Adrien Bouley: Got it. Yeah, absolutely. The cap interest, for sure. That makes sense. Okay.

Carl Edwin Reichardt: Self develop off balance sheet is going to cost you something so can you guys elaborate a little bit on what youre seeing in terms of availability of capital and the price of that capital today, whatever off balance sheet structure of your choosing.

Speaker Change: Yes, Hi, Carlos Eric.

Matthew Adrien Bouley: And then maybe we'll just stick on that long-term gross margin outlook. I think you said in the release that you were sort of thinking about the low to mid 20. The second part of the margin question would be what are lot costs doing in the gross margin today? And is there a period where, as you deplete that sort of pre-COVID lower cost land, should we expect that there's kind of a correction in the margin, like a one-time correction as you see kind of newer cost land flow through? How would that sort of play through into that longer-term margin guide? Thank you.

Erik Heuser: Yes, it's a good question I'll start kind of on the cost side of the equation. When we have joint ventures, which we do have a fair number of you've got alignment with kind of like minded builders and so the cost of that really is nominal because youre kind of off balance sheeting that in a separate vehicle land banking to your point I think.

Erik Heuser: Yeah, this is Erik. I'll take a stab at that again, and then Curt can fill in some blanks. Yeah, to your point, we do still have some pre-COVID land. It's still about a third of our land. And so we will continue to see that flow through. And it's been very consistent. We've seen that percentage kind of decrease 3, 4, 5 percent per quarter over time. And so we won't see a material fall off or cliff in that regard.

Erik Heuser: So we do still have some. You know, our average vintage of our land portfolio today is about 3.8 years, and it really hasn't changed that much over the last number of years. So that's not terribly different from history either. So that's kind of the rearview mirror.

Curt VanHyfte: In terms of today and current, you know, taking a look at surveys and peers, I would say that land is increasing on both the raw dirt side of the equation, kind of 8, 9, 10 percent. And that really is somewhat normal. And obviously, you need about 2.5, 3 percent of ASP left to cover that over time. And so that seems somewhat balanced and, quote unquote, normal, as we've seen over time.

Speaker Change: Has it gotten more expensive, we do still have a decent amount of our lots and land bank had six or 7000 lot.

Curt VanHyfte: And then lastly, and Curt can elaborate on this, we're seeing in terms of our flow through the P&O, we are seeing a little bit of an increase, but it's not terribly meaningful. It's kind of floating in that 3, 4 percent range as we think about the average lot cost coming through the P&O. And then, very lastly, I would say we track very closely our expected gross margin and land residual ratio in our underwriting.

Speaker Change: And that was a single digit number.

Speaker Change: And so that was something that we found great comfort and we're continuing those negotiations today.

Speaker Change: And think we'll find something that's attractive is an ongoing vehicle with regard to land banking seller financing is actually our largest bucket.

Speaker Change: I can tell you from our average cost of that capital, it's about four 5% to 5% across the portfolio.

Speaker Change: Lastly is just general takedown structures.

Curt VanHyfte: And I could tell you that our most recent land residual ratio is the same as it has been over the last nine years on average. And so that, coupled with kind of our gross margin consistency in underwriting, gives us confidence that we're going to see kind of that somewhat normalized land appreciation and be able to cover it. Yeah.

Speaker Change: When we've got escalators, they tend to gravitate to about 7%. So you put that all in the blender and it's actually a pretty attractive cost of capital for the deferral vehicles we've used.

Speaker Change: Okay. That's very helpful. Thank you I appreciate that Okay, and then just to go back to the current trends can can you should go down a little bit on how Florida is performing across the price points, especially during this particular quarter in and what your outlook is given that you know obviously, we've begun to see a bit of an increase in existing home inventory.

Matthew Adrien Bouley: And Matt, just to kind of double down on that, as Erik alluded to, year-over-year, 23-24, we've got assumed in our guide about a mid-single-digit kind of appreciation factor or inflation in our lot cost, so right around that mid-single-digit kind of threshold.

Speaker Change: And some whispers of the slowing market there at least in the existing site. So I'm just curious as to your perspective on that market now thanks a bunch.

Speaker Change: Yeah, No I appreciate the question Carl.

Matthew Adrien Bouley: Great. Thanks, everyone. Good luck.

Speaker Change: No it's gotten a lot of.

Speaker Change: A lot of airtime lately, but we had a very strong quarter in Florida.

Operator: The next question comes from Carl Reichardt with BTIG. Please go ahead.

Carl Edwin Reichardt: As we've moved into April as you heard in our comments things have continued pretty well I would say, it's it's actually consistent with what I already articulated that where we're seeing the more affordable buyers were probably working a little harder that would be like our Orlando market, we're actually working a little harder for each of those deals.

Carl Edwin Reichardt: Thanks. Morning, everybody. It's nice to talk to you.

Erik Heuser: Just following up on those last couple of questions, the increase in margin is at least part a function, too, of growing your lots per community by, what, 50% over what they used to be, right? So you've got some better fixed cost spread in the stores, I'm assuming, but I'm curious about the price and availability of off-balance sheet capital today. You talk about self-developing helping your margin, but self-developing off-balance sheet is going to cost you something. So can you guys elaborate a little bit on what you're seeing in terms of the availability of capital and the price of that capital today, whatever off-balance sheet structure you're choosing?

Speaker Change: But all in all when I look at traffic when I look at web traffic when I look at conversions.

Speaker Change: The market pretty consistent pretty healthy.

Speaker Change: I appreciate the color thanks al.

Speaker Change: Thank you.

Speaker Change: Our next question comes from Alan Ratner with Zelman and Associates Alan. Please go ahead.

Erik Heuser: Yeah, hi Carl, it's Erik. Yeah, it's a good question. I'll start kind of on the cost side of the equation. You know, when we have joint ventures, which we do have a fair number of, you've got alignment with like-minded builders. And so the cost of that really is nominal, because you're kind of off-balance sheeting that in a separate vehicle.

Alan S. Ratner: Hey, good morning, Thanks, as always for all the great info so far greatly appreciate it.

Alan S. Ratner: First question I guess, just in the context of the improving cycle times and kind of normalization. There I was just curious how youre thinking about the spec mix of your business now I know you as well as others kind of ramped spec production.

Erik Heuser: Land banking, to your point, I think has gotten more expensive. We do still have a decent amount of our lots in land bank. It's six or seven thousand lots, and that was a single-digit number.

Alan S. Ratner: To kind of combat some of those challenges and are you seeing more of an opportunity to kind of shift back towards more PTO.

Alan S. Ratner: Just any color you can kind of get a general about margin differential and kind of demand for spec versus build to order at this point would be great.

Erik Heuser: And so that is something that we found great comfort in. We're continuing those negotiations today and think we'll find something that's attractive as an ongoing vehicle with regard to land banking. Seller financing is actually our largest bucket. I could tell you from the average cost of that capital, it's about four and a half to five percent across the portfolio. And lastly, it's just general takedown structures, and when we've got escalators, you know, they tend to gravitate to about seven percent. So you put that all in a blender, and it's actually a pretty attractive cost of capital for deferral vehicles.

Speaker Change: Sure Hey, Alan how are you.

Speaker Change: Great.

Alan S. Ratner: Good Hey, this correct by the way I will just kind of tackle that in and of Sheryl, let her chime in along the way, but overall I think we're pleased with where we're at with our balanced between spec and to be built I think we're right around 54% for the quarter from a sales standpoint.

Alan S. Ratner: We think thats been a pretty good spot.

Alan S. Ratner: As we've said in the past, we will mirror that to kind of where the market is.

Sheryl Denise Palmer: Okay, that's very helpful. Thank you. I appreciate that. Okay, and then just to go back to the current trends, can you give Joe a little bit on how Florida is performing across the price points, especially during this particular quarter, and what your outlook is given that, you know, obviously we've begun to see a bit of an increase in existing home inventory and some whispers of the flowing market there, at least on the existing side. So just curious as to your perspective on that market now. Thanks a bunch.

Alan S. Ratner: With our blended and diverse kind of platform that we have as you know we do more spec in our entry level and then as we move through the scale up to resort lifestyle. It becomes more of a to be built kind of mantra. So.

Alan S. Ratner: We're very happy with that I see is kind of hovering in that same kind of threshold over time and to your point from a cycle time standpoint, we're very pleased with the results we've seen and what we expect to come over the course of the rest of the year, so but as we sit here today I think we like our balanced approach relative to our spec and our to be built.

Sheryl Denise Palmer: Yeah, no, I appreciate the question, Carl. You know, I know it's gotten a lot of airtime lately, but we had a very strong quarter in Florida. As we've moved into April, as you heard in our comments, things have continued pretty well. You know, I would say it's actually consistent with what I already articulated that where we're seeing the more affordable buyers, we're probably working a little harder. That would be like our Orlando market; we're actually working a little harder for each of those deals. But all in all, when I look at traffic, when I look at web traffic, when I look at conversions, the market is pretty consistent and pretty healthy.

Alan S. Ratner: Business.

Speaker Change: Yeah, and the only thing I'd add I'm, taking it a little different place Alan just because I think it's an important data point.

Speaker Change: Kurtz balanced you know commentary spot on but when I look at the square footage, that's really where we see a difference and what we're putting out in the market I mean, our specs are generally a few hundred square feet less.

Speaker Change: Then our to be built buyers. So it's it's to me, it's an interesting kind of journey because our to be built buyers are continuing.

Speaker Change: To go with larger houses so spending lots of money on options.

Carl Edwin Reichardt: I appreciate the color. Thanks, all.

Speaker Change: Hi lot premiums.

Operator: Our next question comes from Alan Ratner with Zelman & Associates. Alan, please go ahead.

Speaker Change: When we look at our square footage, we're trying to push kind of more affordable product into the market to the tune of about 400 square foot difference on average.

Alan S. Ratner: Hey, good morning. Thanks, as always, for all the great info so far. Greatly appreciated. First question, you know, I guess just in the context of the improving cycle times and kind of normalization there. I'm just curious how you're thinking about the spec mix of your business now. I know you, you know, as well as others, kind of ramped up spec production to kind of combat some of those challenges. And, you know, are you seeing more of an opportunity to kind of shift back towards more BTO, you know, and just any color you can kind of give in general about the margin differential and kind of demand for spec versus built orders at this point would be great.

Speaker Change: And so when you look at our kind of average numbers. It really is the tale of two different stories.

Speaker Change: Got it now that's what's interesting thank you for that Sheryl.

Speaker Change: Second question just on the pilot acquisition first of all I think it makes a ton of sense, obviously, given the cash balance that had been building on the balance sheet.

Speaker Change: I'm just curious Indianapolis as your first Midwestern market you guys have entered into and it seems like the Midwest for one reason or the other is kind of one part of the country, where the public market share isn't quite as large as the coasts mm.

Sheryl Denise Palmer: Sure. Hey Alan, how are you?

Speaker Change: It would seem like there is a potential opportunity there to even expand the footprint further effects. The direction you guys are interested in going so I'm just curious.

Curt VanHyfte: Great. Good. Hey, this is Curt, by the way.

Speaker Change: With Indianapolis kind of unique in terms of market attributes that made you guys focus on that one versus some other Midwest markets or would you say this could potentially be a stepping stone for further growth throughout the region.

Curt VanHyfte: I'll just kind of tackle that, and I'm sure I'll let her chime in along the way. But overall, I think we're pleased with where we are with our balance between spec and to-be-built. I think we're right around 54 percent for the quarter from a sales standpoint, and we think that's in a pretty good spot. As we've said in the past, we will mirror that to kind of where the market is. And with our blended and diverse kind of platform that we have, as you know, we do more spec at our entry level.

Speaker Change: That's a really good question and as we've talked about for quite some time, probably the last year or so Alan you know for us to go back into any sort of M&A transaction. It would really have to be strategically appropriate accretive to the business right and so when we look at Indianapolis.

Curt VanHyfte: And then, as we move through the scale up to the resort lifestyle, it becomes more of a to-be-built kind of mantra. So we're very happy with that. I see us kind of hovering in that same kind of threshold over time. And to your point, from a cycle time standpoint, we're very pleased with the results we've seen and what we expect to see over the course of the rest of the year. But as we sit here today, I think we like our balanced approach relative to our spec and our to-be-built business.

Speaker Change: And we look at kind of top homebuilding top twenty-five homebuilding Marquette kind.

Speaker Change: Kind of the immediate generation of outlets and the access to finished lots along with other pipeline deals in that market and the percentage of control being kind of consistent with Taylor Morrison veteran management team and just a very I mean unbelievable respectable historic financial.

Sheryl Denise Palmer: Yeah, and the only thing I'd add... Taking it a little different place, Alan, just because I think it's an important data point. Curt's balanced, you know; his comments are spot on.

Speaker Change: Position. The company has had it's just a really wonderful.

Speaker Change: Aligned.

Speaker Change: For us when we look at the Midwest, we've been looking at Indianapolis for honestly years, but it had to be we've been very patient and it has to be the right. The right deal the right management team the right strategy.

Sheryl Denise Palmer: But when I look at the square footage, that's really where we see a difference in what we're putting out in the market. I mean, our specs are generally a few hundred square feet less than our 2B Build buyers. So it's it's to me it's an interesting kind of journey because our 2B Build buyers are continuing to go with larger houses, still spending lots of money on options, and high lot premiums, but when we look at our square footage, we're trying to push kind of a more affordable product into the market to the tune of about 400 square feet difference on average. And so when you look at our kind of average numbers, it really is the tale of two different stories.

Speaker Change: Today, our focus is that.

Speaker Change: And to get the business integrated which we think given Todd pie. It's leadership, it's gonna happen relatively quickly we will see what happens from there or anything we did from here from an M&A standpoint would have to meet those high thresholds as we've talked about but is there you know additional growth organically coming from Indianapolis certainly that would.

Speaker Change: Something we look like look out like we do with every other market.

Speaker Change: And maybe just to double click on a couple of things sure Alan.

Speaker Change: A few of the other things that we like about Indianapolis. So as we think about managing the portfolio was just watching it over time in terms of that affordability measures that we highlighted really hasnt changed very much its been really high on the affordability measuring stick for it.

Alan S. Ratner: Got it. Now, that's interesting. Thank you for that, Sheryl.

Sheryl Denise Palmer: Second question, you know, just on the PYAT acquisition. First off, I think it makes a ton of sense, obviously, given the cash balance that has been building on the balance sheet. I'm just curious, you know, because Indianapolis is the first Midwestern market you guys have entered into. And, you know, it seems like the Midwest, for one reason or another, is kind of one part of the country where the public market share isn't quite as large as the coasts.

Speaker Change: Going back to the downturn and as a result of that it's been a relatively low volatile market. So we think thats an accretive part of the portfolio for us as we just think about managing the overall business the land development and.

Sheryl Denise Palmer: In my role is actually.

Speaker Change: Very relatively low risk here and so we like that.

Speaker Change: A bit.

Sheryl Denise Palmer: So it would seem like there's a potential opportunity there to even expand the footprint further, if that's the direction you guys are interested in going. So I'm just curious, you know, was Indianapolis kind of unique in terms of market attributes that made you guys focus on that one versus some other Midwest markets? Or would you say this could potentially be a stepping stone for further growth throughout the region?

Speaker Change: And so and then to your point I think in terms of market share.

Speaker Change: I think that of the top 10 builders, who are only five of them are publics.

Speaker Change: And so from a competitive standpoint that just leads us to believe that there's one way huh, Yeah, and then just to pile onto your pile on Eric I think the last thing that obviously I should reiterate Alan is that obviously, we still took up our margin guidance.

Sheryl Denise Palmer: That's a really good question. And as we've talked about for quite some time, probably the last year or so, Alan, for us to go back into any sort of M&A transaction, it would really have to be strategically appropriate and accretive to the business, right? And so when we look at Indianapolis, and we look at kind of the top home building, top 25 home building market, kind of the immediate generation of outlets, the access to finished lots, along with other pipeline deals in that market, and the percentage of control being kind of consistent with Taylor Morrison, a veteran management team, and just a very, I mean, unbelievable, respectable historic financial position that companies have had, it's just a really wonderful, aligne

Speaker Change: The initial expectations are there is no goodwill in the transaction and that this will be accretive to Taylor morrisons portfolio.

Sheryl Denise Palmer: Today, we're very excited.

Speaker Change: Okay, that's great and just to be clear and then I'll hop off the 10% closing guidance annually, that's not assuming any additional market expansion either organic or through acquisition is that correct.

Speaker Change: That's correct I mean at some point dollars are fungible right and so if you like like to your point, if you grow the Indianapolis, but Brad are you grow until you know.

Sheryl Denise Palmer: When we look at the Midwest, we've been looking at Indianapolis for, honestly, years, but it had to be the right deal, the right management team, the right strategy. So today, our focus is that. And to get the business integrated, which we think, given Todd Pyatt's leadership, it's going to happen relatively quickly. We'll see what happens from there. Anything we did from here, from an M&A standpoint, would have to meet those high thresholds, as we've talked about. But is there, you know, additional growth organically coming from Indianapolis? Certainly, that would be something we look at, like we do with every other market.

Sheryl Denise Palmer: <unk> kind of fringe markets that evolving markets emerging markets I mean to me that's all on the same but generally yes, that's an organic expectation.

Speaker Change: Great understood. Thanks, guys I appreciate it.

Speaker Change: Thank you.

Sheryl Denise Palmer: Yeah.

Sheryl Denise Palmer: The next question comes from Ken Sena with Seaport Research partners.

Speaker Change: Please go ahead.

Speaker Change: Good morning, everybody could you talk good morning, how many of your closings.

Sheryl Denise Palmer: I'm from lots you actually acquired finished either this quarter or kind of LTM, where that trend line is.

Sheryl Denise Palmer: If you have that.

Speaker Change: Let's say hold on and Ken are you talking about the ones that we would have acquired it.

Erik Heuser: And maybe just a double click on a couple things, Sheryl. Alan, a few of the other things that we like about Indianapolis as we think about managing the portfolio is just watching it over time in terms of that affordability measure that we highlighted really hasn't changed very much. It's been really high on the affordability measuring stick going back to the downturn. And as a result of that, it's been a relatively low-volatile market.

Sheryl Denise Palmer: I'm sorry, it acquired has been actually I've tried to see exactly I'm just trying to see how that mix has kind of run through your balance sheet.

Erik Heuser: <unk>.

Alan: Yeah over time, it has come down I would say it's come down from over the last few years from a third to something like 15%.

Erik Heuser: And so as a result of that obviously.

Erik Heuser: So we think that's an accretive part of the portfolio for us as we just think about managing the overall business. Land development in my world is actually relatively low risk. And so we like that quite a bit. And then, to your point, I think in terms of market share, I think that of the top 10 builders here, only five of them are public. And so from a competitive standpoint, that just leads us to believe that there is one right here.

Erik Heuser: Theres benefits in terms of the margin profile, but we pivoted to more self development and a balance sheet friendly way.

Erik Heuser: Right.

Speaker Change: I don't know if could you guys disclosed that pick about 8600 inventory units 80, 575% or something like that do you have the actual <unk>.

Erik Heuser: Progress of the vertical construction costs on your balance sheet as well as land associated with that.

Erik Heuser: About.

Erik Heuser: Yeah, and then just to pile on to your pile on, Erik, I think the last thing that I should obviously reiterate, Alan, is that obviously we still took up our margin guidance. The initial expectations are that there is no goodwill in the transaction and that this will be accretive to Taylor Morrison's portfolio effective today. We're very excited.

Speaker Change: Yes, Ken I Havent read here, it's about $1 billion five.

Erik Heuser: At the end of Q1.

Speaker Change: Excellent. Thank you guys so much.

Speaker Change: Thank you.

Erik Heuser: Our next question comes from Jay Mccanless with Wedbush. Please go ahead.

Speaker Change: Hey, good morning, everyone. Thanks for taking my questions. The first one I had and I apologize I jumped on a little late but could you talk about why the gross margin was up year on year and why youre thinking there might be a sequential decline in the gross margin going into <unk>.

Alan S. Ratner: That's great. And just to be clear, and then I'll hop off, the 10% closing guidance annually is not assuming any additional market expansion, either organic or through acquisition. Is that correct?

Speaker Change: Yeah, Hi, How's it going.

Sheryl Denise Palmer: That's correct. I mean, at some point, dollars are fungible, right? And so if you like, to your point, if you grow the Indianapolis footprint, or you grow into, you know, kind of fringe markets, evolving markets, emerging markets, I mean, to me, that's all in the same, but generally, yes, that's an organic expectation. Great.

Speaker Change: I can talk on that Jay a little bit just.

Sheryl Denise Palmer: Europe sequentially I think.

Speaker Change: Did you say sequentially are yet Q2 coming down to approximately.

Sheryl Denise Palmer: Approximately 23 and here I can maybe I'll just talk a little bit about the Q1 beat we had a real good Q1 beat we saw some house cost savings come through there we experienced on average about $2 a square foot.

Alan S. Ratner: Great, understood. Thanks guys, I appreciate it.

Alan S. Ratner: Some mix come through we saw a little bit of some lower incentives throughout kind of the country as well, but relative to the margin.

Operator: The next question comes from Kenneth Zener with Seaport Research Partners. Please go ahead. Good morning, everybody.

Kenneth Zener: Guide from Q1 to Q2, we are pulling it down a little bit some of that is of course mix. We've got higher revenue concentration in some of our lower margin divisions offer.

Kenneth Zener: Thank you, everybody. Could you talk about how many of your closings came from lots you actually acquired and finished, either this quarter or some kind of LTM where that is?

Kenneth Zener: Set are coupled with the fact that we've got lower revenue coming from our higher margin division. So there's a mix factor going on there and then of course.

Erik Heuser: Um, let's see, hold on. Are you talking about the ones that we would have acquired? I'm sorry, Acquired as finished.

Kenneth Zener: Incentive will continue we'll continue to use our incentive loads for our entry level buyers based on the number of specs, we're going to solve the close here in Q2.

Kenneth Zener: Exactly. Exactly. I'm just trying to see how that mix has kind of run through your balance sheet, you know, recently.

Speaker Change: Okay, Alright, that's great. Thank you and then the next question I had.

Kenneth Zener: Building off what Carl asked regarding the east.

Erik Heuser: Yeah, over time, it has come down, right? I would say it's come down from, you know, over the last few years from a third to something like 15%. And so, as a result of that, obviously, I believe there are benefits in terms of the margin profile, but we've pivoted to more self-development in a balance sheet-friendly way.

Erik Heuser: Does the east segment over index to entry level and affordable communities or is it still kind of a third a third a third like what you've always said the company tends.

Erik Heuser: <unk> tends to trend in terms of the buyer segmentation.

Erik Heuser: And I think he is just an interesting mix because I would tell you that our Orlando and Tampa business very different than our Sarasota and our Naples business is primarily first time.

Kenneth Zener: Right. And I don't know, could you guys disclose? I think about 8600 inventory units or 8575 or something like that. Do you have the actual work in progress of the vertical construction costs on your balance sheet as well as land associated with that? I'm out.

Kenneth Zener: So when I compare that to central Austin would be our largest first time buyer market.

Curt VanHyfte: Yeah, Ken, I have it right here. It's about $1.5 billion at the end of Q1.

Curt VanHyfte: And second to are next in line would be Houston, and Dallas it'd be a small piece and then when I get to the west.

Kenneth Zener: Excellent. Thank you guys so much.

Kenneth Zener: It's a pretty good mix of first time and move up first time in parts of the West like Bay, It's still at an average sales price of $800000. So generally I think that's a fair comment Jay given the penetration of Tampa, and Orlando and the east and the East area.

Operator: Our next question comes from Jay McCanless with Wedbush. Please go ahead.

Jay McCanless: Hey, good morning, everyone. Thanks for taking my questions. The first one I had, and I apologize for jumping on a little late, but could you talk about why the gross margin was up year-on-year and why you think there might be a sequential decline in the gross margin going into 2G?

Speaker Change: Okay, Great. That's all I had thank you.

Speaker Change: Thank you.

Curt VanHyfte: Yeah, hi. How's it going? I can talk about that, Jay, a little bit. Just you're sequentially, I think. Did he say sequentially?

Curt VanHyfte: Our next question comes from Alex Barron with housing Research Center. Please go ahead.

Jay McCanless: Yes, Q2 coming down to just approximately 23 and a half. Yeah, maybe I'll just talk a little bit about the Q1 beat. We had a real good Q1 beat. We saw some house cost savings come through there. We experienced, on average, about $2 a square foot.

Speaker Change: Yes. Thanks for squeezing me in I, just wanted to ask about the ESP and orders, particularly in central was that.

Jay McCanless: Mainly.

Jay McCanless: More people buying more entry level homes or are you guys building smaller homes or what drove the price decrease there.

Curt VanHyfte: We had some mix come through. We saw a little bit of some lower incentives throughout the country as well. But relative to the margin guide from Q1 to Q2, we are pulling it down a little bit. Some of that is, of course, mix. We've got higher revenue concentration in some of our lower margin divisions, offset by the fact that we've got lower revenue coming from our higher margin divisions.

Curt VanHyfte: Yes, Hi, Alex.

Curt VanHyfte: As a function of more affordable entry level products, and our Houston and Austin divisions.

Curt VanHyfte: Houston, we've been talking a lot about that marketplace kind of evolving here over the last couple of years of being heavily reliant on master planned communities in the past and now it's doing more self developed.

Curt VanHyfte: Itself and a balance sheet friendly manner.

Curt VanHyfte: So there's a mix factor going on there. Then, of course, incentives will continue to use our incentive loads for our entry-level buyers based on the number of specs we're going to sell to close here in Q2.

Curt VanHyfte: And so they've introduced more entry level and first move up type of communities.

Curt VanHyfte: Which is what youre seeing in there kind of transformation over the last couple of years.

Curt VanHyfte: And they kind of go to earlier comment we made as well Alex Ware to curts point with often in Tucson are often and.

Jay McCanless: Okay, all right, that's great, thank you. And then the next question I had, kind of building off what Carl asked regarding the East, does the East segment over-index to entry-level and affordable communities, or is it still kind of a third, a third, a third, like you've always said the company tends to trend in terms of buyer segmentation?

Jay McCanless: Houston being first time our spec.

Jay McCanless: Inventory is about 400 square feet less than our to be built and so when we talk about a higher spec penetration just the overall square footage is going to bring down that S. P.

Sheryl Denise Palmer: Yeah, the East is an interesting mix because I would tell you that our Orlando and our Tampa business, very different than our Sarasota and our Naples business, is primarily first time. So, when I compare that to Central, Austin would be our largest first-time buyer market, and second to, or next in line, would be Houston, and Dallas would be a small piece, and then when I get to the West... It's a pretty good mix of first-time and move-up, but first-time in parts of the West like the Bay is still at, you know, an average sales price of $800,000. So generally, I think that's a fair comment, Jay, given the penetration of Tampa and Orlando in the East, in the Eastern area.

Speaker Change: Got it.

Speaker Change: Okay great.

Speaker Change: So would you expect the ASP to continue trending lower than.

Sheryl Denise Palmer: Okay.

Sheryl Denise Palmer: In central specifically.

Sheryl Denise Palmer: Yes.

Sheryl Denise Palmer: Consistent when do you think they are I would say it would be more consistent because I think the transformation.

Sheryl Denise Palmer: Kind of.

Sheryl Denise Palmer: And I guess gone its course has run its course in Houston, So I think it'll be pretty consistent from here on out.

Speaker Change: Got it and as far as the Indianapolis.

Speaker Change: Or was that more of an asset purchase or did you guys, bringing the whole team and you're just structured it more like.

Sheryl Denise Palmer: More like that.

Sheryl Denise Palmer: Yes, and yes, it's an asset purchase, but we are retaining the entire team and very excited about it.

Sheryl Denise Palmer: Okay.

Speaker Change: Okay, great well congratulations thank you.

Jay McCanless: Okay, great. That's all I have. Thank you.

Speaker Change: Thank you.

Jay McCanless: We have no further questions. So I'll hand, the call back to Cheryl Palmer for closing remarks.

Operator: Our next question comes from Alex Barron with the Housing Research Centre. Please go ahead.

Operator: Yeah.

Alex Barron: Well, thank you very much for joining us for our Q1 call.

Alex Barron: Yes, thanks for squeezing in. I just wanted to ask about the ASP and orders, particularly in Central. Was that just mainly, you know, more people buying more entry-level homes, or are you guys building smaller homes, or what drove the price decrease there?

Alex Barron: You're all very wish you the best and we look forward to talking to you next quarter take care.

Speaker Change: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

Alex Barron: [music].

Erik Heuser: Yeah, hi, Alex. That's the result of more affordable entry-level products in our Houston and Austin divisions. You know, Houston, we've been talking a lot about that marketplace kind of evolving here over the last couple of years, being heavily reliant on master-planned communities in the past, and now it's doing more self-developed in an allergy-friendly manner. And so they've introduced more entry-level and first-move-up type of communities, which is what you're seeing in their kind of transformation over the last couple of years. And it kind of goes to...

Alex Barron: Take care.

Sheryl Denise Palmer: And it kind of goes to an earlier comment we made as well, Alex, where, to Curt's point, with Austin and Tucson, or Austin and Houston being the first time, our spec. Inventory is about 400 square feet less than our TB belt. And so when we talk about higher spec penetration, just the overall square footage is going to bring down that ASP.

Alex Barron: Okay, great. So would you expect the ASP to continue trending lower then?

Erik Heuser: in Central specifically? Yes. Consistent, would you think? Yeah, I would say Alex it would be more consistent because I think the transformation that has kind of I guess gone its course has run its course in Houston. So I think it'll be pretty consistent from here on out.

Alex Barron: Got it. And as far as the Indianapolis deal, was that more of an asset purchase, or did you guys bring in the whole team, and you just structured it more like that?

Sheryl Denise Palmer: Yes, and yes, it's an asset purchase, but we are retaining the entire team and are very excited about it. Okay, great.

Alex Barron: Okay, great. Well, congratulations. Thank you.

Operator: We have no further questions, so I hand the call back to Sheryl Palmer for closing remarks.

Sheryl Denise Palmer: Well, thank you very much for joining us for our Q1 call. We wish you all the very best, and we look forward to talking to you next quarter. Take care.

Operator: Thank you everyone for joining us today. This concludes our call, and you may now disconnect your lines.